S&P: Beware the $46trn ‘perfect storm’ in corporate credit

Standard & Poor’s has said a ‘perfect storm’ may be brewing in corporate credit markets if a global economic downturn combines with credit rationing to thwart corporations’ $46trn refinancing needs.

A report from the ratings agency estimates the funding needs of non-financial corporates to be between $43trn and $46trn over the next five years, of which $30trn is existing debt and $13trn-16trn is new money required to spur growth.

But the eurozone crisis and a limited US recovery, coupled with the prospect of a slowdown in China, may add to problems caused by a limited supply of credit from traditional institutions, S&P said.

“This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds,” said Jayan Dhru, senior managing director of global corporate bond ratings at S&P.

“Combined with the eurozone crisis, the slow U.S. economic recovery, and the prospect of a slowing economy in China, this raises the downside risk of a perfect storm in global corporate credit markets.”

S&P’s base case is that most corporate issuers will be able to manage their forthcoming refinancing requirements, but it warned downside risks remain and said the balance is “very fragile”.

“Existing or new sensitivities could flare up and derail our base case. Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances,” Dhru said.

Companies’ uneasiness over accessing debt markets have created liquidity problems of their own in the post-crisis era, according to Kames Capital bond manager Stephen Snowden.

Snowden said in March that liquidity in the investment grade corporate bond market had fallen 80% since 2007 as a result of deleveraging and investors’ looking to equities instead of bonds for their income requirements.

“In the last two years we have seen net new issuance of zero or even negative – and the primary reason for this has been the recent trend for dividend investing.”

“In order to have a strong dividend policy, companies need a sustainable balance sheet that is not leveraged or issuing debt,” Snowden said at Incisive Media’s fund5live event.

 

This article was first published on Investment Week

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