Corporate America Is Choking on Debt and Imperiling the Recovery

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  1 / 4Corporate America Is Choking on Debt and Imperiling the Recovery
• 2 / 4Corporate America Is Choking on Debt and Imperiling the Recovery
• 3 / 4Corporate America Is Choking on Debt and Imperiling the Recovery
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• 4 / 4Corporate America Is Choking on Debt and Imperiling the Recovery

Paula SeligsonAugust 21, 2020, 5:00 AM CDT

(Bloomberg) — After tapping the bond market at a record-shattering pace in recent months, Corporate America is more indebted today than ever before.

And while much of that fresh cash — more than $1.6 trillion in total — helped scores of companies stay afloat during the pandemic lockdown, it now threatens to curb an economic recovery that was already showing signs of sputtering. Many companies will have to divert even more cash to repaying these obligations at the same time that their profits sink, leaving them with less to spend on expanding payrolls or upgrading facilities in months ahead.

The over-leveraging of America’s corporate sector is not a brand-new development, of course. It’s been building for more than a decade, ever since the last crisis — the housing-market meltdown — prompted the Federal Reserve to pump unprecedented amounts of cash into the economy, a policy tool that it has taken to new heights during the pandemic as it has supported corporate credit markets.- ADVERTISEMENT –

But in a sign of just how pronounced the borrowing overhang has become, the average junk-rated company had debt levels relative to earnings that were so high in the middle of the year, according to a new analysis by Bloomberg Intelligence, that they almost would have tripped do-not-touch alerts from banking regulators a few years ago. Those warnings back then only applied to a handful of borrowers. Had regulators not opted to drop these warnings, they could today apply to far more.

“An overburdened corporate sector is likely to grow less rapidly and that could slow the whole recovery down,” said Kathy Jones, chief fixed-income strategist for Charles Schwab Corp.

A slower recovery could have wide-reaching implications in financial markets. Many securities prices reflect investors’ expectation that profits will normalize next year, when in fact it could take at least two or three years, said Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management in New York. She sees many junk bonds as being overpriced.Story continues

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