Well-structured balance sheet needed amid red-hot US corporate credit market

The past decade has been good for corporate bonds: interest rates have been kept low by a steady economic recovery , and inflation has been muted.

The environment for corporate bonds remains benign with abundant liquidity, but we are worried we may face a nasty credit squeeze in the US. While we don’t believe that market tops or bottoms can be forecast in advance, we can take the temperature of a market and determine if it is running hot or cold . In our view, there are many signs that the US corporate credit market is running extremely hot.

There has been enormous issuance of lower-rated credit, comprising both US corporate high-yield debt and leveraged loans , both now more than double pre-global financial crisis peaks. As some companies are well suited to leverage, the debt size may be a misleading measure in isolation. Businesses with long-life assets, stable revenues and wide cash operating margins — such as real estate companies — can typically handle gearing.

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