Over the past decade, companies have taken advantage of low rates both to grow their businesses and reward shareholders.
Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent, according to Securities Industry and Financial Markets Association data. Other than a few hiccups and some fairly substantial turbulence in the energy sector in late-2015 and 2016, the market has performed well.
In fact, Fitch Ratings forecasts bond defaults for 2019 at the lowest since 2013, with leveraged loans at the lowest since 2011.
Such high debt levels are “certainly something to take notice of,” said Eric Rosenthal, Fitch’s senior director of U.S. leveraged finance. “In terms of the systemic risk, at the moment it’s not there.”
One reason markets worry about debt is that there’s not as much cash around to cover it. The cash-to-debt ratio for corporate borrowers fell to 12 percent in 2017, the lowest ever.
Still, there’s reason for optimism.
Fitch estimates that new investment grade issuance was $531 billion through the third quarter, a more than 15 percent drop from the same period a year ago. High-yield issuance also has declined to $138 billion, a 32 percent drop from 2017.
The 2017 tax breaks also appear to be helping. Companies saw their nominal tax rates reduced from 35 percent to 21 percent, and apparently are using a large chunk of the windfall to knock off some debt.
Since the tax cut took effect, the top 100 corporate nonfinancial companies have spent $72 billion of new cash flows to debt payments, a bit behind the $81 billion that went to shareholder returns through buybacks and dividends, according to Moody’s Investors Service.
“Companies are spending a much larger percentage of incremental dollars on debt reduction,” the ratings agency said in a report. “What we see when we look at the annual net borrowing activity is a big swing from issuers changing from a net borrower each year pre-tax overhaul to a net-payer of debt post-tax overhaul.”