Corporate Debt Binge Will Ebb, Moody’s Predicts

Earnings slowdown expected to propel a movement away from heavy borrowing.

US companies’ gluttonous feast on debt may be coming to an end, according to Moody’s Analytics.

And what a meal it has been: In the first quarter, nonfinancial corporate debt climbed 8.1%, year over year, to $9.926 trillion, Moody’s noted. This is a new record.

The reason that Moody’s gives for this trend to ebb: Earnings and sales are on the downswing. A Moody’s research report cited early June’s Blue Chip consensus of business economists’ projection for only a 2.7% rise in nonfinancial corporations’ core pretax profits in 2019.

That’s about one-tenth of their level in 2018. Meanwhile, sales growth has slowed to 2.3% in the January-April period this year, compared to 5.8% in the year-ago period.

“Downwardly revised predictions for corporate earnings,” wrote John Lonski, chief economist of Moody’s Capital Markets Research, “may encourage more companies to deleverage balance sheets, or at least slow the growth of their debt obligations relative to both prospective sales and cash flows. In turn, the annual growth rate of nonfinancial corporate debt might be expected to slow considerably from first quarter 2019’s 8.1%.”

Already, a borrowing deceleration is showing up in bank loans to companies. In the first quarter, they increased 10.1%, but in April that slowed to 7.6%. Bond issuance still appears to be on the upswing, for now.

Lonski pointed to the likelihood that interest rates should, at some point, begin to rise, which could further choke off debt demand from companies. With the Federal Reserve seemingly poised to trim its benchmark short-term rate, that may not be imminent. But that was the way things were trending before fears sparked by the trade war put the upward bias on rates on hold for the moment.

Surely, the low rates that have stoked the corporate appetite for debt will not persist forever.

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