Fallout from leveraged loans could be worse than in past, hitting investors who bought corporate debt for higher returns
The record U.S. corporate debt boom is about to be put to the test.
Companies that loaded up on cheap and abundant debt during the past decade will face their first significant hurdle of the cycle as a $4 trillion mound of maturing bonds come due over the next five years, analysts from Oxford Economics warned on Thursday.
U.S. companies already are seeing declining profits and rising leverage, both of which can make it harder for weak companies to keep current on their debt servicing. If economic growth slows further and lenders become less accommodating, any failure to roll over maturing debt could spillover into other parts of the economy including the job market, wrote senior economist Lydia Boussour.
“While in itself, the corporate debt load is unlikely to trigger a recession, the next downturn could destabilize corporate debt markets, which in turn could fuel additional tightening of financial conditions and further dampen investment and employment,” Boussour wrote.
This graph shows the coming wall of maturities faced by both investment-grade and speculative-grade U.S. companies over the next few years.