(Bloomberg) -- Why is credit under pressure once more? Mainly because the decade since the global financial crisis has not been the “Decade of Deleveraging” that many expected. Banks have delevered since then, but that debt largely has moved to governments and other corporates, both of which are far more heavily levered than they were in 2008. Household debt remains essentially unchanged.
That explains why corporate credit is bearing the brunt of concerns this time — even the highest-quality corporate names. The yield spread that companies rated BAA or better by Moody’s must offer compared with Treasuries has shot up in recent days to the highest since 2012.
As a result of this extra leverage, companies in the broad S&P 1500 have sharply increased their total debt to assets. The median company in the index now has a record leverage ratio, according to the SG Cross Asset team at Societe Generale.
Smaller companies have taken on particularly big risks. SG Cross Asset shows that large-caps have far greater interest coverage. For the smallest 50% of all U.S. businesses, interest coverage already was declining before the current crisis took hold.
The smaller companies have seen their share prices hammered as analysts increasingly fear they are overlevered. While operating earnings of businesses in the Russell 2000 have barely moved since the crisis, net debt has increased almost four-fold.
The recent selloff has been driven by the collapse of the oil price, as well as concerns that the response to the coronavirus will hit economic growth. The U.S. shale revolution has been financed in large part by high-yield bonds, and FTSE’s index of high-yield U.S. energy credits has tumbled in the last week. It also did so when the oil price tanked from 2014-2016 during the last breakdown in OPEC discipline, but this fall has been even sharper.
The problem is not restricted to the U.S. The national oil producers of Mexico and Brazil are vital to their host countries’ economic prospects, and both are the subject of deep criticism over their corporate governance. Yields on debt for Petrobras and Pemex have almost doubled since the oil price began its recent slide.
Beyond the oil sector, there is concern that emerging markets, as defined by the Institute of International Finance, have sharply increased their borrowing since the 2008 crisis. This is true of households, governments and banks, and particularly nonfinancial corporations, whose debt on its own is now almost equivalent to total emerging-market GDP.
Central to the concerns has been China’s corporate sector, which took on huge amounts of extra leverage after the country launched its aggressive fiscal stimulus at the end of 2008. There have been attempts to rein this in since China’s unscheduled and disorderly devaluation of 2015 briefly sent tremors through global markets. But China’s nonfinancial corporate debt remains some 60% higher than its GDP. Most is in local currency, and it remains to be seen how indebtedness will have been affected by the slowdown to contain the coronavirus.
Meanwhile, emerging markets as a whole have — as usual — borne the brunt of the “risk-off” move in global markets. The JPMorgan EMBI spread, the benchmark for the extra yield emerging governments must pay compared with equivalent Treasuries, has shot up to the highest since the early weeks of 2009.
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