Corporate debt has reached an all-time high. A lot of companies are going bankrupt and even insolvent, because of the effect of the Covid-19 pandemic on the economy. The cash-strapped companies are frantically trying to shore up their balance sheets, debts are hitting the roof, and getting even bigger.
Asset Manager, Janus Henderson which analyzed 900 companies from around the globe, said net borrowing could increase by as much as $1 trillion this year over 2019 when it surged to $8.3 trillion. So, corporate debt is poised to soar to a new record in 2020,
“As the global recession takes hold, profits and cash flow will be sharply lower,” Janus Henderson analysts said in the report. Even as companies slash dividends and share buybacks, “borrowing needs will be very large this year,” they continued.
Is Having More Debts Deadly For These Companies At This Point In Time
However, having more debt isn’t necessarily a bad thing, as companies will need much more access to credit in order to strengthen their cash circle. Also, this will help in engineering economic recovery and foster market stability. However, the crux of the matter is maintaining payments to investors and servicing these debts.
Also, one of the major concerns is in the sustainability of the debts, as high-profile companies have filed for bankruptcy in recent weeks, the likes of Brooks Brothers to Chesapeake Energy, etc.
In a bid to fortify financial positions going into the pandemic, some large multinationals like FedEx, Nike, and UPS, quickly tapped credit markets in March. Also, according to Janus Henderson’s portfolio manager Seth Meyer, credit issuance has shifted to lower-quality borrowers in recent weeks.
The Federal Reserve has been buying corporate bonds to keep credit markets functioning through the period of this black swan in the market. Hence, investors aren’t worried, as these actions have helped in indicating lower perceptions of risk and higher demand, by driving down yields.
Corporate debt will be a focal point of earnings for most of these companies. Also, in a recent note to clients, Citigroup’s Hans Lorenzen said that he expects to learn that European companies borrowed €450 billion ($510 billion) between March and May, almost three times as much as they borrowed during the same three months in 2019.
What To Know U.S Corporates And Their Debts
Meanwhile, American companies owe almost half the world’s net corporate debts. This is due to their global scale and access to credit, with a greater willingness to borrow.
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