U.S. corporations borrowed a record $2.5 trillion in bonded debt in 2020, sending the American business sector’s debt-to-earnings ratio to another record high, surpassing the one set last year, Bank of America has reported.
However, corporations show signs of being increasingly unable to repay those loans.
One measure: the growing number of so-called “zombie companies,” whose interest payments have exceeded profits for three consecutive years.
The number of zombie companies is approaching the record level reached toward the end of the 1990s’ dot-com bubble, according to the Leuthold Group, an investment research firm.
Also, a record number of companies in debt have seen their credit ratings downgraded to “triple C minus,” barely above junk-bond status.
Still, analysts predict corporations seeking to take on even more debt will find investors ready to lend.
“It is insane,” Alex Veroude, CEO at Insight Investment, commented to the Financial Times. “But it’s the reality.”
This reality has been created by the U.S. Federal Reserve, economists agree.
“The Fed has created the expectation of a bailout,” Veroude said. “It almost doesn’t matter” that fundamentals indicate that the markets are flying on fumes.
TRENDPOST: To keep the economy oiled, in March, the Fed began buying corporate bonds ranging from top-rated to near-junk. The measures allowed many companies to remain operating during the crisis and avoid bankruptcy.
But the programs also sparked the greatest corporate borrowing binge on record, which followed years of already-low interest rates that encouraged businesses to borrow their way out of the aftermath of the Great Recession.
The money junkies have widely praised the Fed for artificially propping up big corporations during the shutdown and averting a worse crisis. However, as The New York Times even noted, “the concern is that [the Fed] has simply left businesses comatose on central-bank life support.”
