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What Will Change: Corporate Debt Levels
The level of corporate debt likely won’t be going down any time soon given the economic impact of the coronavirus. Despite the economic good times of the 1990s and last decade, corporate debt has been increasing – to record levels. Particularly since the financial crisis, despite a record period of economic growth and the tax cuts that occurred in 2018, corporate debt has been increasing. The level of corporate debt fell during the financial crisis as the economy contracted and the availability of loans declined as many financial institutions were facing difficulties. However, that was different. In the current economic scenario, new loan programs sponsored by the Federal Reserve, fiscal stimulus programs, and the decline of the economy will likely increase corporate debt. Since the financial crisis, it has pretty much been up, up, and away for corporate debt – despite economic growth for over a decade and tax cuts. The graph below shows the amount of nonfinancial corporate debt for large (public) corporations, including debt securities and loans, since 1990. U.S. nonfinancial corporate debt of large companies exceeded $10.1 trillion dollars in 2019, up over 50% from the $6.5 trillion in 2008 during the financial crisis. Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level 1990 - 2019 Source: Graph from Federal Reserve Economic Database (FRED)
As a percent of GDP, U.S. nonfinancial corporate debt of large companies now stands at about 48%, up from the 44% of 2008 GDP. Also on the rise, leveraged loans to corporations. Leveraged loans can be viewed as relatively risky loans made by lenders to corporations, where the company receiving the loan already has a significant amount of debt outstanding and/or a low credit rating. According S&P Global Market Intelligence, leveraged loans increased by approximately 20% in 2018, from approximately $950 billion at year-end 2017 to $1.15 trillion at year-end 2018. No matter how you slice it, generally corporate debt has been increasing and getting riskier, no matter what size the company. The greater the amount of debt, the greater the chance that companies will not be able to withstand financial distress in an economic downturn. The greater the amount of debt, the greater the chances that corporate bailouts will be required by the federal government for corporate sustainability. Despite a record long economic expansion and tax cuts, financial vulnerabilities to an economic downturn increased for many companies.
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Center for Business and Economic Insight - CBEI EXTRA!
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