The Organization for Economic Cooperation and Development, the global group of 36 major nations, has issued a warning about the swift increase of corporate debt around the world and the dangers it poses if interest rates rise or a recession takes hold.
By the end of 2019, outstanding corporate bonds held by companies outside the financial industry totaled $13.5 trillion worth of debt, matching a record set in 2016.
Since 2008, the average annual bond issue has been $1.8 trillion, twice the average from 2000 through 2007.
High debt has been cited as a cause of the Great Recession in 2008. The debt load is much higher now.
The report cited central banks’ policies of low interest rates and quantitative easing as a prime reason for the $2.1 trillion in corporate bond debt added in 2019.
The OECD also cautioned that the current basket of bonds “has lower overall rating quality, higher payback requirements, longer maturities, and inferior investor protection” than normal.
Since 2010, about 20 percent of bonds issued have been junk bonds or “non-investment grade.” The proportion rose to 25 percent in 2019.
Bonds rated BBB, which is barely above junk-bond status, now make up 51 percent of outstanding corporate bonds, compared to 39 percent from 2000 to 2007.
In 2019, only 30 percent of the bonds were rated A or better.
The OECD noted this is the longest period since the 1980s’ junk-bond craze that the proportion of low-grade bonds has been so high. This signals that “default rates in a future downturn are likely to be higher than in previous credit cycles.”
Also, more bonds now have longer times to maturity, making them susceptible to rising interest rates.
As interest rates rise, bond values fall.
Angel Gurria, the OECD’s secretary-general, said the bond burden demands market reforms that include “the ability of equity markets to strengthen corporate balance sheets and support long-term investments.”
The OECD study reviewed data on more than 92,000 corporate bonds issued in 114 countries from 2000 through 2019.
A report to the G20 group of nations, made public last month, sounded a similar alarm.
It warned of risks to the world’s financial system of “an unexpected and unplanned reversal of abundant global liquidity.” If one central bank shuts off the cheap-money spigot, the report added, there could be “strong contagion” to other countries.
“The supply of private liquidity cannot be relied upon in periods of stress,” the report noted and public supplies – IMF reserves, government bailouts, and other sources of last resort – are likely to be inadequate.
TREND FORECAST: The dominos may be beginning to fall. Last week, Fitch and S&P ratings services downgraded Kraft Heinz’s $21 billion in bonds from BBB to junk status.
The OECD pointed out that the reason for the record debt load and rising risk is that central banks have enforced artificially low interest rates. Corporations have used that cheap money to buy their own stocks, boosting the price and fattening executive bonuses.
As Trends Journal subscribers have known for a long time, the rising stock market isn’t the result of underlying value but comes from the decades long drip of monetary methadone that central banks, i.e., money junkies, sell to addict gamblers on the Street, also known as “investors.”
Despite our forecast for continued lowering of interest rates, which, in effect, will somewhat ease corporate debt loads, as the “Greatest Depression” sets in and businesses and industries contract, the bankruptcy crisis will intensify.