US Corporate debt worries exaggerated
The real problem is that capital is not generating growth
Goldman Sachs credit strategists today worry about overheating in corporate debt markets:
“After stalling at the end of last year, corporate credit growth picked up sharply during the first quarter, and the second quarter has so far shown robust debt issuance, tighter credit spreads, and even a modest rebound in bank lending.
With borrowing now reaccelerating and corporate credit nearing a new record, we ask whether debt levels may in fact be moving too high, particularly given the risk that higher interest rates and labor cost pressures could weigh on credit fundamentals.
While we believe US credit quality remains fairly healthy in the aggregate and for the median issuer, the deterioration in interest coverage ratios over the last two years is concerning and has reduced the ability to withstand shocks. While the continued high level of coverage ratios suggests scope for resilience in the face of higher interest rates, the potential consequences of higher wage growth are more difficult to anticipate.”
One problem with this analysis is that bank lending has been falling during the past four weeks, and total commercial and industrial loans outstanding are slightly lower than at year-end.
Goldman’s strategists did a fine job of tallying bond issuance by nonfinancial corporations, but a great deal of issuance doesn’t necessarily mean a net increase in debt. All-in corporate yields are at very low levels. Moody’s long-term Baa corporates yield just 4.34%, barely above the all-time low of 4.20% registered in early 2015. Corporations may be issuing to pre-fund maturing debt at lower levels.
Judging from capital equipment orders, they don’t seem to be spending the money on CapEx. And there hasn’t been any wage inflation to speak of. So GS’ worries about corporate overheating may be a tad exaggerated. The problem, rather, is to persuade lazy capital on corporate balance sheets to take risks and generate growth.