Either falling profit margins or higher interest rates could turn America's corporate-debt boom to bust
debt set off the global financial crisis in 2007. But for much of the subsequent recovery America has looked like a paragon of creditworthiness. Its households have rebuilt their balance-sheets; its firms have made bumper profits; and its government goes on providing the world’s favourite safe assets.
Thanks to low interest rates and high profits, American companies are on average well able to service their debts.has analysed the balance sheets of publicly traded American non-financial firms, which currently account for two-thirds of America’s $9.6trn gross corporate non-financial debt. Their combined earnings before interest and tax are big enough to pay the interest on this mountain of debt nearly six times over.
The rapid growth of leveraged loans is what most worries people about the growth in corporate debt. The list of policymakers to have issued warnings about them, as Mr Powell has done, include: Janet Yellen, his predecessor at the Fed; Lael Brainard, another Fed policymaker; the; the Bank of England; and the Bank for International Settlements, the banker for central banks.
s have long been the asset of choice for investors wanting exposure to leveraged loans. And they have a pretty solid record. According to Goldman Sachs, a bank, in 2009 10% of leveraged loans defaulted, but top-ratedsecurities suffered no losses. The securitisation protected senior investors from the underlying losses, as it is meant to.
That said, defaults on loans are not the only way for corporate debt to upset the financial system. Take investment-grade corporate bonds. In 2012 about 40% of them, by value, were just one notch above junk status. Now around 50% are. Should these bonds be downgraded to junk—thus becoming “fallen angels”, in the parlance of debt markets—some investors, such as insurance firms, would be required by their mandates to dump them.
But in January Mr Powell signalled that the central bank would put further rate rises on hold, and worries about indebtedness faded. Stocks recovered; credit spreads began falling, leveraged loans rallied strongly. In February. It no longer looks as if high interest rates will choke the supply of corporate credit in the near future.
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