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A $1 Trillion Powder Keg Threatens the Corporate Bond Market

They were once models of financial strength—corporate giants like AT&T Inc., Bayer AG and British American Tobacco Plc.

Then came a decade of weak sales growth and rock-bottom interest rates, a dangerous cocktail that left many companies feeling like they had just one easy way to grow: by borrowing heaps of cash to buy competitors. The resulting acquisition binge left an unprecedented number of major corporations just a rung or two from junk credit ratings, bringing them closer to a designation that historically has made it much more expensive to fund daily business and harder to navigate economic downturns.

In fact, a lot of these companies might be rated junk already if not for leniency from credit raters. To avoid tipping over the edge now, they will have to deliver on lofty promises to cut costs and pay down borrowings quickly, before the easy money ends.

Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found:

  • By one key measure, more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody’s Investors Service and S&P Global Ratings.
  • The vast majority of the 50 deals—valued at $1.9 trillion collectively—were financed with debt.
  • This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market, Bloomberg Barclays index data show.

“The rating agencies are giving companies too much wiggle room,” said Tom Murphy, a money manager at Columbia Threadneedle Investments. “There’s been some pretty heroic assumptions around cost savings and debt repayments laid out by some borrowers involved in mergers.”

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