McKinsey: Rising corporate debt: Peril or promise?

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GAAP
Posts: 580
Joined: Fri Apr 08, 2016 12:41 pm

McKinsey: Rising corporate debt: Peril or promise?

Post by GAAP » Tue Jun 19, 2018 11:06 am

Summary at https://www.mckinsey.com/business-funct ... or-promise

36-page PDF at https://www.mckinsey.com/~/media/mckins ... final.ashx
In the latest installment of a series of reports on global debt, Rising corporate debt: Peril or promise? (PDF–456KB), the McKinsey Global Institute looks at the growth in one corner of the global debt market: corporate debt. The total debt of nonfinancial corporations, including bonds and loans, has more than doubled over the past decade, growing by $37 trillion to reach $66 trillion in mid-2017, or 92 percent of global GDP. This growth is nearly equal to the increase in government debt, which has received far more attention. In a departure from the past, a large share of the growth in corporate debt has come from developing countries, and in particular China, which now has one of the highest ratios of corporate debt relative to GDP in the world.
Key points:
  • Global corporate bond markets have expanded, but risks are rising in the bull market
  • Record refinancing over the next five years comes at a time when some companies and sectors may be vulnerable
  • There is significant scope for further growth in corporate bond markets, but banks, investors, and policy makers need to be prepared to react to bumps in the road ahead
There is a nice visualization tool at https://www.mckinsey.com/business-funct ... lobal-debt

How do people feel about the "safety" of bonds?

Does this influence your perspective on global bonds? What about Emerging Market debt?

With decreasing returns and increasing risks, are bonds in any form even a good investment choice?

Are bonds and stocks both headed for a fall? Will we have that perfect storm of major market losses?

What, if anything, should we change in our asset allocations, return projections, inflation expectations, etc.?

garlandwhizzer
Posts: 1938
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Re: McKinsey: Rising corporate debt: Peril or promise?

Post by garlandwhizzer » Tue Jun 19, 2018 1:12 pm

It is not entirely clear whether rising debt will be peril or promise in the long run, but high corporate debt levels do increase risk of default in the rapidly expanded corporate bond markets. In recent years many investors, frustrated by persistently low interest rates, flocked to high yield bonds and less secure corporate bonds and corporations anxious to borrow money money at low rates were eager to provide supply. How it will end up is not clear but IMO now is certainly not the time to stretch for yield and sacrifice safety in fixed income markets. Spreads in rates between high quality and moderate/low quality bonds do not IMO currently compensate for the level of increased risk. Debt works beautifully and makes everyone happy until it doesn't. When the tide turns it can quickly get ugly.

Garland Whizzer

2015
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Re: McKinsey: Rising corporate debt: Peril or promise?

Post by 2015 » Tue Jun 19, 2018 6:36 pm

Taking micro action based on McKinsey's latest marketing is akin to leaving your SO because a fortune teller tells you she sees "issues of love" in your future. Time would be better spent reading these to get a better idea of who and what in fact McKinsey really is:

https://www.amazon.com/Firm-McKinsey-In ... 5DYVX0YG71

https://www.amazon.com/Golden-Passport- ... 0062347179

Reading non-fiction widely outside the fields of investing, economics, and personal finance provides perspective, context, and expands one's ability to engage in second-order thinking. Taking action based on financial marketing, be it from financial blogger websites, mutual fund websites, academics, financial publications of any type, or even some of the pin-dancing threads here, is tantamount to first-order thinking. Second-order thinking may very well be the most valuable cognitive skill one can acquire in a world where upwards of 95% of what we ingest mentally is white noise designed only to devour our personal agency for benefit beyond us.

GAAP
Posts: 580
Joined: Fri Apr 08, 2016 12:41 pm

Re: McKinsey: Rising corporate debt: Peril or promise?

Post by GAAP » Tue Jun 19, 2018 8:16 pm

I'm well aware of McKinsey's influence on big business. I don't make financial decisions based upon the recommendations of any organization or person -- including the sainted names popular in this forum.

In any case, I was more interested in the general observations within the report -- changes in debt composition, potential ability of debtors to repay and/or refinance their debt, distribution of debt across economies, etc. Those topics are all relevant to evaluating how much fixed income to hold and in what types.

Theoretical
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Joined: Tue Aug 19, 2014 10:09 pm

Re: McKinsey: Rising corporate debt: Peril or promise?

Post by Theoretical » Wed Jun 20, 2018 6:45 am

In my mind, the other problem is that the ratings agencies are still corrupt/improperly influenced/using bad models.

Examples include the drastically lower quality of corporate debt classified as BBB (much higher leverage) and the absolute mockery that has become municipal bond ratings where Tennessee and New Jersey GO bonds have the same AAA ratings when they have vastly different mid to long term pension risk and other liabilities. I think it’d actually be a great service if the big bond buyers got together and built a buyers side rating agency to offset the troika.

Boglegrappler
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Re: McKinsey: Rising corporate debt: Peril or promise?

Post by Boglegrappler » Wed Jun 20, 2018 7:05 am

Time would be better spent reading these to get a better idea of who and what in fact McKinsey really is:
A quick glance at those titles tells me that I have about 500 plus better things to do than to waste time with some whining leftist non-American who thinks McKinsey and its business is some kind of "secret". For those who aren't already familiar with the firm, there are much better ways to learn about it.

I think the original link is quite informative, and has very good factual information---not the least of which is the observation that much of the debt in the developing countries is denominated in outside currencies.

carguyny
Posts: 303
Joined: Mon Aug 08, 2016 4:56 pm

Re: McKinsey: Rising corporate debt: Peril or promise?

Post by carguyny » Wed Jun 20, 2018 7:06 am

I do not own Corporate Bonds as I like my bonds for safety rather than return. There is no risk benefit to holding a basket of Corp bonds vs Treasuries. I also don't hold any MBS, agency bonds etc - just boring Treasuries.

I started my career 20 years ago in Debt Capital Markets and have also been involved in bond processes as an investor/board member. I don't have a lot of faith in credit ratings...

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