Why the upcoming record $ 1.2 trillion in rotten rated debt is a concern

Weaker companies that have borrowed heavily at low interest rates over the past decade might want their fingers crossed over the next five years.

That’s when a record $ 1.2 trillion of speculative and low-grade U.S. corporate debt matures, as slowing domestic and global economic growth has put a damper on brake on several key industries, warned Thursday Moody’s Investors Service.

The business credit boom since the Great Recession of 2008 has not lacked warnings from regulators, investors and financial stability watchers about how a corporate debt bubble could end badly. .

A key question was: when?

Moody’s has indicated that market stress could draw closer as it now has a “negative” outlook on nine sectors where rotten-rated companies have $ 223 billion in collective debt maturing by the end of 2024, compared to just two sectors last year with $ 86 billion in debt maturing.

“The negative outlook suggests slower or weaker earnings growth, which may cause ratings to drop,” wrote a Moody’s team led by Anastasija Johnson.

Bond investors have worried about possible rating downgrades resulting from this credit cycle, mainly because lower ratings – or even a hint of downside – can result in wider spreads for bonds and loans, or the amount of the debt. compensation that a bondholder demands in a risk-free market. benchmark to hold debt.

More expensive debt often signals distress and a higher likelihood of a borrower defaulting, which can also lead to a drain on liquidity for a business or for entire swathes of an entire industry.

This chart details the sectors with the highest rated debt due until 2024.

Bad debt wall maturing

Moody’s Investor Service

The chart includes debt related to telecommunications, manufacturing and the auto industry, areas that Moody’s recently included in its list of industries with a negative outlook. This year the automobile compartment also includes the Ford Motor F,
-0.92%
$ 160 billion in maturing corporate debt, according to Moody’s, which downgraded the Detroit automaker’s credit rating to the trash in September.

Ford still holds investment grade ratings from S&P and Fitch, which by Wall Street standards means debt can be included in high quality corporate bond indices.

To verify: Here’s Why Corporate Debt Investors Might Want to Consider Downgrading Ford to ‘Trash’

Ford, which earlier this month saw its market cap eclipsed by Tesla Inc. TSLA,
+ 0.16%,
said on Wednesday it expects to take a pretax charge of $ 2.2 billion in the fourth quarter related to pension obligations that will reduce its bottom line.

Yet an important factor for indebted companies will be whether the Federal Reserve is maintaining credit and whether the US economy grows slightly long enough for them to refinance.

Moody’s noted that high yield bond issues jumped 62% last year to $ 282 billion “amid more accommodative monetary policy from the US Federal Reserve and tighter spreads”, which allowed last year to significantly reduce the amount of maturities to five years.

To verify: Here’s Why Corporate Debt Investors Might Want to Consider Downgrading Ford to ‘Trash’

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