Saturday, November 02, 2019

Use of debt in corporate America

Interest rates have been low for a while. That's one reason why American companies are currently sitting on a record US$15.5 trillion in debt. However, this debt was not primarily used to finance expansion and growth but more commonly to jack up stock prices through dividends, stock buybacks and acquisitions.

And then we have what sounds like a repeat of the Great Recession. $660 billion of companies’ so-called leveraged debt is held in collateralized loan obligations that have been sold to a variety of investors and financial institutions. The IMF estimates that half of corporate debt – excluding small businesses – is high risk, or junk rated, which has a much higher chance of default than investment grade debt.

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