Six Striking Observations About Corporate Debt

Tyler Durden's picture

Here are a handful of striking observations on the real problem with the global debt bubble, courtsy of CLSA's Damien Kestel, and why any spike in interest rates could lead to a global fiasco.

Extraordinary low interest rates around the world have delivered a monumental blow to many investors. Falling interest rates have translated into rising liabilities for (defined benefit) pension plans and, secondly, millions of retirees, who depend on income from savings to take them through retirement, are struggling to make a decent living.


Consequently, investors take risks that they weren't previously prepared to take, some of which I am comfortable with, and some of which I am not. Take US corporate high yield bonds. The prevailing view seems to be that US corporates (ex. energy) are in very good shape with loads of cash on their balance sheet, and that they therefore offer a relatively attractive, and a comparatively safe, investment opportunity.


I beg to disagree. Firstly, we are late in the economic cycle, and it is usually a bad idea to buy corporate high yield bonds late in an economic upturn. Secondly, let me share some facts with you that undermine the perception outlined above:

  1. The 1% most cash-rich of all US companies control over 50% of all US corporate cash.
  2. The five most cash-rich US companies (Apple, Microsoft, Google, Cisco and Oracle) control 30% of all US corporate cash.
  3. Total US corporate debt (the other side of the balance sheet) was $5.03 trillion at the end of 2015- up from $2.62 trillion at the end of 2007.
  4. Net debt (i.e. debt ex. cash) amongst US corporates was $3.39 trillion at the end of 2015 vs. $1.88 trillion at the :nd of 2007.
  5. US corporate debt has risen by $2.8 trillion over the last five years, while corporate cash has only risen by $600 billion.
  6. If you back out the top 1% referre~ to in (1) above, the cash holdings of the remaining 99% fell 6% in 2015 to stand at just $900 billion by the end of December vs. $6.6 trillion of debt.

Based on those numbers, I think it is fair to say that, with the exception of a few extremely cash-rich companies, corporate America is increasingly indebted and not at all as cash-rich as widely perceived.  This also explains why corporate investments in the US are at a 60-year low.


* * *

And then, even thought we've covered it before, there's this:

Governments globally are persisting with monetary expansion to support economic growth and prop up inflation, to the detriment of credit quality, particularly for over-indebted Chinese corporates and U.S.leveraged borrowers.


In our base-case scenario, we project global corporate credit demand (flow) of $62 trillion over 2016-2020, with new debt representing two-fifths and refinancing the rest. Outstanding debt would expand by half to $75 trillion, with China's share rising to 43% from 35%.


We estimate that two-fifths (43%) to half (47%) of nonfinancial corporates (unrated and rated) are highly leveraged-of which 2% to 5% face negative earnings or cash flows, based on a sample of about 14,400 corporates.


With weakened borrower credit quality, a credit correction is inevitable. Our base case is for an orderly credit slowdown stretching over several years ('slow burn' scenario), but a series of major economic or political shocks, such as the recent Brexit vote in the U.K., could trigger a more system-wide credit contraction ('Crexit' scenario).

Yes, the music is still playing, but it is getting a little fainter with every passing day.

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pathosattrition's picture

Borrow all the cheap money (non-recourse) you can and buy real assets in jurisdictions which don't extradite and don't have similar access to credit.

buzzsaw99's picture

Total US corporate debt (the other side of the balance sheet) was $5.03 trillion at the end of 2015- up from $2.62 trillion at the end of 2007...

Even had the author written "non-financial" corporate debt his numbers would still be way off.

Paul Morphy's picture

Perhaps instead you can provide us with the figures that the author should have used.

BandGap's picture

They will PULL.THE.FUCKING.PIN or nature will pull it for them.

They have only so long to pick the time, after that it's up to fate.

Clock Crasher's picture

Times up mutha fuckas!!


Clocks a crashing

Kirk2NCC1701's picture

U r correct. Which is why Trump is front-running the issue, by doing the following:

- super-charge employment

- deregulation (Reagan 2.0), to reduce corporate costs

- reduce corporate tax, from 35% down to 15%

- reduce tax rate on repatriated corporate money from offshore, to bring back $Trillions

Since the dollar will keep losing market share (with direct country-to-country deals that avoid the dollar), and foreign CBs no longer being able to keep buying US debt, all those dollars will come home anyway.

To mask the inflow of dollars and cause inflation, the middle-class needs to be placated, before they get out the pitchforks and rope.

Trump is positioning himself as the Savior of Corporate America and the Fed, similarly how Obama did in 2008: "I'm the only thing between you and the Angry Masses and their pitchforks". His statement today that "the US Debt is sacred", said it all that the Fed and Wall St needed to hear.

I think that his Plan is far more sound in its fundamentals, than is illary's. This may cause TPTB to choose him, rather than illary. It's his latest Art Of The Deal.


WTFUD's picture

No need to worry until we get into the quad trillions. Is that molten lava on the horizon, there yonder?

GUS100CORRINA's picture

This information is really disturbing ... maybe this is how it all ends. Man in his infinite, flawed wisdom leads directly to heartbreak, sadness and destruction. 

any_mouse's picture

Same now, as it has been forever.

Technology advances, Scale expands, Humanity doesn't change.

oncemore's picture

Apple, Microsoft, Google, Cisco and Oracle control 30% of all US corporate cash. Means they have a high margin. Achieved employing imported cheap knowledge from overseas, or producing in overseas (Apple)....

Means cheating on the system.

Dear US Americans, eliminate those companies, or charge them a high corporate tax for their import of cheap indian labour, or cheap chinese labour.

bullock's picture

Short & enlithening, I like it very much.