Who’s afraid of US corporate debt? Pockets of weakness rather than broad fragility characterise the sector § The level of total business debt has fallen as a proportion of GDP since the global financial crisis reflecting the deleveraging of financial companies. § On aggregate, US non-financial corporate indebtedness has risen as a proportion of GDP, but remains subdued as a proportion of business income (net operating surplus) and has fallen as a proportion of profits.
§ Moreover, with interest rates low, interest payments as a proportion of business incomes are still at decade-low levels.
§ However, favourable conditions have encouraged many companies to adjust their capital structure which has seen borrowing from corporate debt markets increase 130% since the financial crisis.
§ This has included a large increase in BBB-rated (and single A) issuance, leading to a modest deterioration in overall credit index quality.
§ In the main, low interest rates make these debt structures affordable. And in stress-test scenarios, only in the most extreme cases do we envisage a deterioration in interest-cover ratios.
§ Moreover, we expect recent developments (rising interest rates and Tax Reform changes) to result in a contraction of non-financial corporate debt growth over the coming years.
§ We identify pockets of weakness in credit markets, where leverage is high and interest-cover ratios are low.
§ Legitimate concerns over contagion risk are somewhat assuaged by relatively high corporate liquidity and the borrowing disintermediation over the past decade.
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