The Trillion-Dollar Question: Will the Corporate Borrowing Binge Cause Lasting Damage?
US investment-grade corporate issuance has topped US$1 trillion year to date, putting it on track to plow through previous annual records. What are the real long-term effects of this explosive balance sheet growth? A closer look at net borrowing levels and why issuers borrow creates a roadmap of potential industry potholes to avoid.
Bonds, Bonds Everywhere
A trillion dollars in bond issuance in a matter of months is remarkable. The borrowing binge stemmed from a confluence of events, including coronavirus uncertainties, low interest rates, and the Federal Reserve’s expanded support of the corporate bond market. Issuance in and of itself isn’t good or bad, but sectors and industries that took on too much debt for their circumstances may face a tougher road post-COVID-19.
What do we mean by overborrowing? We compared how much a company has borrowed to the amount of its debt that matures by the end of 2021. The goal was to identify which companies may be opportunistically borrowing more than they need today to cover debts maturing in the next two years.
Rolling these numbers up gives us a look at which sectors may have overdone it with borrowing. In the basic materials sector, for example, companies borrowed over 80% more than they needed to retire upcoming debt (Display). Consumer noncyclicals, on the other hand, were much more judicious in tapping debt markets.
For companies that have overborrowed, it’s important to look at why they did so. Some companies were merely taking advantage of low interest rates to build a liquidity buffer, for example. Others used the debt to ramp up leverage or to act as a bridge to cover a period of negative free cash flow (FCF).