Great piece from Bloomberg on the decade-long, $11 TRILLION corporate borrowing frenzy, fueled by central banks' ultra-cheap money flooding the global financial system and money managers' (desperate) hunt for yield in this negative rates environment.
Titans of Junk:
Behind the Debt Binge That Now Threatens Markets
By Shannon D. Harrington, Sally Bakewell, Christopher Cannon and Mathieu Benhamou
July 11, 2018
Bloomberg
Tesla, SoftBank, Dell, Altice
They're the headliners in a decade-long, $11 trillion corporate borrowing frenzy, fueled by central banks that flooded the global financial system with ultra-cheap money. Investors have been lending to virtually anyone willing to pay a decent yield. But now the easy money is coming to an end. Policy makers, after driving interest rates to unprecedented lows, are hiking those rates for the first time in 10 years. For many companies, it will bring new financial pressures. And for some of them, those pressures could trigger disaster.
Bloomberg News delved into corporate filings, debt offerings, M&A deal tables and bond indexes to find the biggest beneficiaries of this decade of loose lending. The search identified 69 companies spanning the globe that have boosted their debt levels by 50 percent or more in the past five years and now have at least $5 billion of debt. Together, they're sitting on almost $1.2 trillion of bonds and loans, most of it rated junk and the majority due within the next seven years.
…
The central banks that enabled the borrowing will now have to manage a precarious dance: weaning markets off their stimulus without triggering a stampede from one of the most crowded trades in a generation. That could culminate in a full-blown crisis.
"There can be a self-fulfilling prophecy here," said Christian Stracke, global head of credit research at Pacific Investment Management Co. in Newport Beach, California. "These companies really do require confidence, and if you have a mix of market volatility with unexpected fundamental weakness, then that could create a much more difficult situation than investors are expecting.
....
With more underwriters falling outside regulatory oversight, leverage in M&A-related deals tracked by debt-research firm Covenant Review climbed from 6.4 times Ebitda in the first quarter of 2015 to more than 7.7 times during the first three months of 2018—well over the regulators' old cap of six times.
And even those figures could prove to be larger than they seem, thanks to accounting adjustments that let companies ratchet up the earnings projections that are used to convince prospective lenders that their investments will be safe. Companies funding buyouts and takeovers are lowering their projected leverage ratios with cost savings or income that may or may not materialize. That practice, referred to as "add-backs" allows companies to pile on greater amounts of debt relative to earnings.
Such lofty projections are becoming increasingly common in the fine print of loan documents. Covenant Review, which scrutinizes the risks in loan terms for its investor clients, says that about 30 percent of the Ebitda figures used to calculate leverage in loan deals this year was made up of add-backs. That's up from just 10 percent in the first quarter of 2015.
Debt Reckoning
More than $4 trillion of junk bonds and leveraged loans will mature globally over the next decade, with the maturity wall peaking in 2024.
Source: Bloomberg
Moody's has already started to warn that investors could end up recovering substantially less in bankruptcies than they have historically. One of the reasons leveraged loans have attracted so many buyers is that they have always been viewed as the safest type of debt you can buy because they are the first in line to be repaid when a company goes bust. Problem is, as companies increasingly tap that market for their borrowings, those lenders are finding that there's no one left behind them to cushion the blow.
"The effect of that when it happens will be larger than people expect because it's like a coiled spring," said Dan Zwirn, chief executive officer at Arena Investors, which manages about $1 billion in investments including loans to small-to-mid-sized companies. When yield-chasing investors "finally feel that shock, whatever that shock is, they'll be surprised about the actual underlying credit quality of what they own—and then realize that what they thought was liquid actually has no bid. Then we'll see fire and brimstone."
Read the whole article here: https://www.bloomberg.com/graphics/2018-corporate-debt/
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