Interesting tid-bit from the article:
“The riskiest category of borrowers has never been more leveraged. Companies with junk credit ratings are holding a record low $8 of debt for every $1 of cash, according to S&P.”
“Ben Breitholtz, data scientist at Bianco Research, found that 14% of the companies in the S&P 1500 don’t have enough earnings before interest and taxes to cover interest expenses. That’s above the world average of 10%.
Chart: Investors' recent preference for more leveraged US companies points to increased risk appetite, complacency – pic.twitter.com/P7oG5YylXp
— (((The Daily Shot))) (@SoberLook) September 24, 2018
According to Goldman’s calculations, the average maturity of new issuance in recent years has averaged between 15-17 years, up from 11-13 years earlier this cycle and <10 years for most of the late 1990’s and early 2000’s.
And while this has pushed back the day when rates catch up to the overall increase in debt, as is typically the case, there is nonetheless a substantial amount of debt coming due over the next few years: according to the bank’s estimates there is over $1.3 trillion of debt for our non-financials coverage maturing through 2020, roughly 20% of the total debt outstanding.
Good Job, C-Suites! You Issued Debt To Buy Stock, Now Rising Rates Will Whack EPS
What is different now – as rates are finally rising – is that as this debt comes due, it is unlikely that companies will be able to roll to lower rates than they are currently paying. A second source of upward pressure on average interest expense is the recent surge in leverage loan issuance, i.e., those companies with floating rate debt (just 9% in aggregate for large caps, but a much larger percent for small-caps). The Fed Funds Futures curve currently implies four more rate hikes (~100 bp) through year-end 2019 (our economists are looking for 2 more than that, for a total of six through year-end 2019). While it is possible that some companies have hedges in place, there is still a substantial amount of outstanding bank loans directly tied to LIBOR which will result in a far faster “flow through” of interest expense catching up to the income statement.
BBG: The global economy is looking shaky and the Bank for International Settlements says central banks may be powerless if it all goes awry. The BIS is also sounding the alarm about surging high-risk lending
— Alastair Williamson (@StockBoardAsset) September 24, 2018
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