One sign that the credit quality of the market has been deteriorating is that, globally, the median bond’s rating has dropped steadily since 1980, from A- to BBB-. The corporate-bond market is divided into investment grade (debt with a high credit rating) and speculative, or “junk”, bonds below that level. The dividing line is the BBB rating. So the median bond is now junk.
At the same time, a prolonged period of low rates has made it very tempting to take on more debt. S&P, a credit-rating agency, says that as of 2017, 37% of global companies were highly indebted. That is five percentage points higher than the share in 2007, just before the financial crisis hit. By the same token, more private-equity deals are loading up on lots of debt than at any time since the crisis.
Even within investment-grade debt, quality has gone down. According to PIMCO, a fund-management group, in America 48% of such bonds are now rated BBB, up from 25% in the 1990s. The companies that issue them are also more heavily indebted than they used to be. In 2000 the net leverage ratio for BBB issuers was 1.7. It is now 2.9.
Investors are not demanding higher yields to compensate for the deteriorating quality of corporate debt; quite the reverse.
The former Deutsche Bank AG trader who now oversees about $3 billion at his LibreMax Capital LLC said in a Bloomberg Television interview that corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe because companies have been the ones gorging the most on the ultra cheap interest rates during the past decade.
“If the first quarter’s volatility is a harbinger of something bigger, I think that you’re going to see a lot more trouble in the corporate market and the equity market than the structured products market,” Lippmann said on the sidelines of the Milken Institute Global Conference in Beverly Hills, California. “The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.”