ratings issued most of this debt. And companies on the lower end of the credit spectrum – high-yield or “junk” borrowers – are out of luck... The Federal Reserve is doing little to help these companies. Even before the coronavirus kick-started the latest credit crisis, around one in every five companies were considered “zombie” companies. That means they could barely afford to pay the interest on their debt. It has now gotten much worse for the companies with poor credit... Credit is now starting to dry up... Banks are again tightening credit, making it more difficult for companies to borrow money. And it goes beyond that... In the latest Federal Reserve survey of large and small banks across the U.S. on their lending standards, banks reported their largest quarterly increase in tightening... ever. As you can see, credit is now tighter than at any time since 2008 ...
is about to soar higher than ever before. During the last financial crisis, the default rate peaked at 12.2% in 2009. It’s likely to surge well past that number in this credit crisis. The first wave of the coronavirus has already exacted tremendous damage... Remember, U.S. corporate debt was already at an all-time high (more than $10 trillion) before the crisis began. The crisis is causing most companies to burn through cash and borrow like there’s no tomorrow. Corporate debt is growing larger with every passing day. The thing is... credit can dry up extremely fast. That’s why American companies have been busy maxing out their bank credit lines and issuing bonds to investors while they still can... U.S. companies have issued a record $1.2 trillion in bonds so far this year, according to market-research firm Dealogic. That’s up nearly 80% from the same period a year ago. Companies with investment-grade credit
80%
BANK LENDING STANDARDS
Banks just tightened credit to a level not seen since 2008
60%
40%
20%
0%
-20%
2008 2005 2002 1999 1996 1993
2020 2017 2014 2011
Source: Federal Reserve Bank of St. Louis
American Consequences
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