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Threat of earnings recession weighs on economies

by LLB Editor
1st Oct 19 11:03 am

Faltering global profit growth threatens an earnings recession. This in turn points to weakening economies and potential spikes in global default rates among weaker credits, S&P Global Ratings said today.

“Corporate leverage is worsening in 2019 as debt rises faster than earnings for non-financial companies,” said S&P Global Ratings credit analyst Terry Chan. “Very low global corporate profit growth (1%) forewarns possible earnings and economic recessions.”

Our economics team recently raised the risk of a U.S. recession in the next 12 months to 30%-35%, after factoring in weakening corporate earnings, among other trends.

S&P Global Ratings analyzed debt trends for a global pool of 20,071 nonfinancial corporates (largely unrated). The exercise revealed that debt and earnings rose in tandem between 2011 and 2017–but the trend diverged in the first half of 2019, as debt growth jumped while that of earnings fell.

Similarly, for our rated global portfolio, we project debt will expand faster than earnings in 2019. If it continues, this trend will increase leverage, as measured by ratios of debt to EBITDA.

“While low interest rates are keeping speculative-grade default rate low (at 2.1% in first-half 2019), high debt levels and slowing economies portend a future spike,” said Mr. Chan.

We believe default rates are likely to be higher in the unrated sample than in the rated portfolio. The sample’s gross debt of US$30 trillion is equivalent to a substantial two-fifths of the estimated total global nonfinancial corporate debt of US$73 trillion.

Rated corporates tend to be larger than most of those in the unrated sample, and less prone to credit stress. Nonetheless, our ratings outlook bias turned worse in the third quarter of 2018, meaning that we have increasingly more negative ratings outlooks and CreditWatch listings than positive ones.

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