As we have warned numerous times - and any trader old enough to have actually lived through a credit cycle can attest to - there is only so much releveraging shareholder-friendly exuberance firms can do before the company's balance sheet becomes questionable. That inflection point has come for US equities. The deterioration of balance-sheet health is "increasingly alarming" and will only worsen if earnings growth continues to stall amid a global economic slowdown, according to Goldman Sachs and JPMorgan's Eric Beinstein warns "the benefit of lower yields for corporate issuers is fading." The weakness is widespread as BlackRock fears "you’ll continue to see some land mines out there."
We first warned of the turn in the credit cycle in 2012, then as it became more obvious in 2013 [12]...
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...and throughout 2014 and into 2015...
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And now, mainstream media has begun to pick up on the massive rise in debt and releveraging that has taken place thanks to the suppression of risk spreads and rates... As Bloomberg reports, [15] the Federal Reserve’s historically low borrowing rate isn’t benefiting corporate America like it used to...
It’s more expensive for even the most creditworthy companies to borrow or refinance even as the Fed has kept its benchmark at near-zero the last seven years. Companies have loaded up on debt. They owe more in interest than they ever have, while their ability to service what they owe, a metric called interest coverage, is at its lowest since 2009, according to data compiled by Bloomberg.
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The deterioration of balance-sheet health is “increasingly alarming” and will only worsen if earnings growth continues to stall amid a global economic slowdown, according to Goldman Sachs Group Inc. credit strategists led by Lotfi Karoui. Since corporate credit contraction can lead to recession, high debt loads will be a drag on the economy if investors rein in lending, said Deutsche Bank AG analysts led by Oleg Melentyev, the bank’s U.S. credit strategy chief.
“The benefit of lower yields for corporate issuers is fading,” said Eric Beinstein, JPMorgan Chase & Co.’s head of U.S. high-grade strategy.
As of the second quarter, high-grade companies tracked by JPMorgan incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysts. The amount the companies owed rose 4 percent in the second quarter, the analysts said.
...
“It does make some of these companies more vulnerable to a growth slowdown or any type of shock,” said Jeff Cucunato, head of U.S. investment-grade credit for BlackRock Inc., the world’s biggest money manager, which said it’s taking a “cautious” approach to high-grade debt. “You’ll continue to see some land mines out there.”
Finally, looking into the future [15], UBS AG’s Matthew Mish sees only tightening lending standards...
He warned clients in an Oct. 7 research note that borrowing costs will rise for the most creditworthy borrowers in the first three months of next year.
...
“We’re more concerned than we were two years ago,” said Stuart Hosansky, principal in Vanguard’s fixed-income group. “We still view overall corporate credit quality as adequate.” Hosansky said the last time he felt that way was 2006.
Companies are trying to keep the cheap-debt party raging as long as they can. Some investors are joining them for what may turn out to be a nightcap, according to Stephen Antczak, head of U.S. credit strategy at Citigroup Inc.
“There are more people that want to buy into the bullish argument than I would expect,” Antczak said. “Maybe because the buy-the-dips mentality has worked so many times in the past.”
And the stock market is always last to figure it out...
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