Home Business News Risks rising in corporate debt market

Risks rising in corporate debt market

by Sarah Dunsby
25th Feb 19 2:01 pm

Global outstanding debt in the form of corporate bonds issued by non-financial companies has hit record levels, reaching almost $13trn at the end of 2018. This is double the amount outstanding in real terms before the 2008 financial crisis, according to a new OECD paper.

Corporate Bond Markets in a Time of Unconventional Monetary Policy said that non-financial companies have dramatically increased their borrowing in the form of corporate bonds. Between 2008-2018, global corporate bond issuance averaged $1.7trn per year, compared to an annual average of $864bn during the years leading up to the crisis.

Companies from advanced economies, which hold 79% of the total global outstanding amount as of 2018, have seen their corporate bond volume grow by 70%, from $5.97trn in 2008 to $10.17trn in 2018.

The corporate bond market in emerging markets, mainly driven by growth in China, reached a total outstanding amount of $2.78trn in 2018, up 395% compared to a decade ago. China has moved from a negligible level of issuance prior to the 2008 crisis to a record issuance amount of $590bn in 2016, ranking second highest in the world.

The risks and vulnerabilities in the corporate debt market are also significantly different from that of the previous pre-crisis cycle. The share of lowest quality investment grade bonds stands at 54%, a historical high, and there has been a marked decrease in bondholder rights that could amplify negative effects in the event of market stress.

At the same time, in the case of a financial shock similar to 2008, $500bn worth of corporate bonds would migrate to the non-investment grade market within a year, forcing sales that are hard to absorb by non-investment grade investors.

Against this background, the paper cites concerns around global economic growth. In the case of a downturn, highly leveraged companies would face difficulties in servicing their debt, which in turn, through lower investment and higher default rates, could amplify the effects of a downturn.

While major central banks have modified their use of extraordinary measures recently, the future direction of monetary policy will continue to affect the dynamics on corporate bond markets. Gross borrowings by governments from the bond markets are also set to reach a new record level in 2019, according to the recent OECD Sovereign Borrowing Outlook 2019.

Any developments in these areas will come at a time when non-financial companies in the next three years will have to pay back or refinance about $4trn worth of corporate bonds, close to the total balance sheet of the US Federal Reserve.

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