Corporate debt levels now rest at an unprecedented $29 trillion, sparking fears that U.S. and global markets are heading toward financial calamity.
Credit rating downgrades across the globe are mimicking 2009 levels while corporate debt to earnings levels are the highest they have been in 12 years. Market anxiety about the drop in corporate earnings is only growing, with one third of global companies currently operating in a funding deficit, reports Bloomberg.
“We’ve never been in a cycle quite like this,” Bonnie Baha, a money manager at DoubleLine Capital told Bloomberg. “It’s setting up for an unhappy turn.”
Standard & Poor’s downgraded 863 corporate debt issuers and just under 6 percent of corporate bonds in 2015, the highest numbers respectively since 2009. Cheap oil continues to thrash the energy industry, elevating the risk of defaults in that sector. Over one third of energy and commodity companies have negative credit outlooks or ratings, according to Bloomberg.
The Office of Financial Research (OFR) listed rising credit risks as one of the top three threats to financial stability for 2016 in their annual report to Congress Wednesday. Slowing global growth and record low Crude oil prices have hampered the ability of corporations to pay back their record debt levels, reports International Business Times.
“Global growth has slowed and the strong dollar is dampening U.S. exports by making U.S. goods more expensive for foreign buyers,” reads the OFR report. “In many emerging markets, such as markets in China, Russia, Latin American nations, and parts of Asia and Eastern Europe, debt levels in the private sector have reached historic highs after years of heavy borrowing. A shock that erodes perceptions about credit quality in U.S. corporations or emerging markets could pose a threat to financial stability.”
Some experts argue that economic fundamentals in the U.S. have been improving however, and that the general outlook for the 2016 economy should be positive. Analysts at S&P estimate that credit risks will stabilize and earnings will begin to recovery, reports Bloomberg.
“There are hairline cracks but it doesn’t mean it’s going to lead to cataclysmic global conditions in the credit markets,” Suki Mann, a former head of European credit strategy at UBS Group AG told Bloomberg. “Leverage is higher but it’s only a problem if you can’t service your obligation and the ability of investment-grade companies to service obligations is at a very good level.”
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