The ballooning edifice of corporate debt across the world is of ever lower quality and potentially more dangerous than it was at the outset of the Lehman crisis, the OECD club of rich nations has warned.
"Any developments in these areas will come at a time when non-financial companies in the next three years will have to pay back or refinance about $US4 trillion worth of corporate bonds.It said the share of investment grade bonds with a precarious BBB rating has soared to 54 per cent from 30 per cent in 2008.This tranche of bonds is vulnerable even to a modest shock. Once cut to junk status they become "fallen angels", automatically ejected from high grade bond funds.
They have to offload their portfolio into a falling market if there is a downgrade. "Investors will have a hard time finding potential buyers," it warned. The volumes then were a fraction of today's gargantuan issuance. The BB yields are currently 5 per cent, and the risk spread over benchmark debt is near record lows at 2.46 per cent. This has the makings of a major upset when the cycle turns in earnest.
The Fed, the European Central Bank, the Bank of Japan and the Bank of England were together buying $US2 trillion of bonds each year at the peak of quantitative easing in 2016. This dropped to zero late last year and is now turning negative.The OECD said bond quality has been deteriorating since the Eighties, implying higher default rates and less capital recovery in a crisis. Covenant protection for creditors has been progressively degraded.
It is striking that debt securities now make 57 per cent of all international credit. Tough new Basel rules may have made banks safer, but these anachronistic lenders are no longer the core of the global system.
AndrewConstance JohnAlexanderMP DamienTudehope gscsydney NSWPlanning LucyTurnbullGSC JakeSaulwick Mattonews Transurban Group debt increased to AU$ 26 bn as at Dec 2018. Happy debt motoring on all toll-ways! The trip must end in tears
ALGAcomms JohnAlexanderMP DamienTudehope gscsydney NSWPlanning Despite all that debt developers just cannot learn and speculate and continue to build. Governments - on a perpetual growth trip to fantasy land - don't warn about the dangers and don't set controls in place