Gundlach: Massive Amounts Of Corporate Debt… Morgan Stanley: 38% Would Be Rated “Junk” If You Use Leverage Ratio Alone

Rising corporate debt: Peril or promise?

Corporate bond issuance has increased 2.5 times over the past ten years, creating a broader and deeper market in many countries. But there are rising risks.

Since the worldwide financial crisis in 2008, total global debt (including household, nonfinancial corporate, and government debt) has continued to rise, growing by three-quarters from $97 trillion in 2007 to $169 trillion in the first half of 2017 in constant exchange rate terms.

In the latest installment of a series of reports on global debt, Rising corporate debt: Peril or promise? (PDF–486KB), the McKinsey Global Institute looks at the growth in one corner of the global debt market: corporate debt. The total debt of nonfinancial corporations, including bonds and loans, has more than doubled over the past decade, growing by $37 trillion to reach $66 trillion in mid-2017, or 92 percent of global GDP. This growth is nearly equal to the increase in government debt, which has received far more attention. In a departure from the past, a large share of the growth in corporate debt has come from developing countries, and in particular China, which now has one of the highest ratios of corporate debt relative to GDP in the world.

Since the financial crisis, many large corporations around the world have shifted toward bond financing because commercial bank lending has been subdued. Annual nonfinancial corporate bond issuance has increased 2.5 times over the past decade, creating a broader and deeper market in many countries.

The development of corporate bond markets is welcome news that could contribute both to the health of financial markets and economic growth. But there are vulnerabilities. The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong, and bond issuance by companies in China and other developing countries—often denominated in foreign currency—has soared.

Global corporate default rates are already above their long-term average, and the prospect of rising interest rates may put more corporate bond borrowers at higher risk. In a new report, we assess the financial vulnerability of companies that have issued debt, and the outlook for the market.