Corporate debt bubble?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Tideout
Posts: 2
Joined: Thu Sep 13, 2018 9:47 am

Corporate debt bubble?

Post by Tideout » Tue Sep 18, 2018 2:00 pm

Hello,

Recently, there was an article in USA Today about corporate debt, being the new bubble/bust. I just wonder about the soundness of balance sheets out there. Possible dividend and buyback cuts? Opinions? Random walker.......I need that Warren Buffett bikini analogy!!

Valuethinker
Posts: 35951
Joined: Fri May 11, 2007 11:07 am

Re: Corporate debt bubble?

Post by Valuethinker » Wed Sep 19, 2018 4:01 am

Tideout wrote:
Tue Sep 18, 2018 2:00 pm
Hello,

Recently, there was an article in USA Today about corporate debt, being the new bubble/bust. I just wonder about the soundness of balance sheets out there. Possible dividend and buyback cuts? Opinions? Random walker.......I need that Warren Buffett bikini analogy!!
Yes. But the timing is unknown. So markets could easily rise 20% from here.

When the next crisis hits, almost by definition we won't see it coming. Saddam invading Kuwait, f'rinstance.

Ron Scott
Posts: 943
Joined: Tue Apr 05, 2016 5:38 am

Re: Corporate debt bubble?

Post by Ron Scott » Wed Sep 19, 2018 5:33 am

The markets, we are told, are efficient so debt issues are already baked into prices so...no problem.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

columbia
Posts: 897
Joined: Tue Aug 27, 2013 5:30 am

Re: Corporate debt bubble?

Post by columbia » Wed Sep 19, 2018 5:49 am

Ron Scott wrote:
Wed Sep 19, 2018 5:33 am
The markets, we are told, are efficient so debt issues are already baked into prices so...no problem.
The global bond market is efficient but the global equity market isn’t? If certain premia/exploitable factors really do exist, it seems like the latter must be true.

garlandwhizzer
Posts: 1971
Joined: Fri Aug 06, 2010 3:42 pm

Re: Corporate debt bubble?

Post by garlandwhizzer » Wed Sep 19, 2018 11:41 am

The problem with high levels of corporate debt won't manifest itself until we have a recession with a substantial drop in corporate profit streams. Likely in a recession investment grade corporate debt will suffer only modest defaults. High yield debt (junk bonds) have done quite well for a long time due to the investor's never ending appetite for increased yield. When we have a recession--according to history one is overdue now--it will be a lot like musical chairs when the music stops for lower quality corporate debt. Interest rate spreads between Treasuries and corporate debt of all types especially high yield are narrow and do not reflect the increased risk of these credit instruments at present IMO.

Garland Whizzer

User avatar
Phineas J. Whoopee
Posts: 7470
Joined: Sun Dec 18, 2011 6:18 pm

Re: Corporate debt bubble?

Post by Phineas J. Whoopee » Wed Sep 19, 2018 1:34 pm

Ron Scott wrote:
Wed Sep 19, 2018 5:33 am
The markets, we are told, are efficient so debt issues are already baked into prices so...no problem.
Nobody has to accept the Efficient Market Hypothesis, in any of its weak, semi-strong, or strong forms, if they don't want to.

PJW

boglerdude
Posts: 628
Joined: Fri Jul 10, 2015 1:28 am
Contact:

Re: Corporate debt bubble?

Post by boglerdude » Thu Sep 20, 2018 12:27 am

Did bondholders get bailed out in ~2008 ?

Who ate most of the losses from the crisis

JBTX
Posts: 4034
Joined: Wed Jul 26, 2017 12:46 pm

Re: Corporate debt bubble?

Post by JBTX » Thu Sep 20, 2018 11:58 am

Corporate debt bubble? Maybe, but some context:

https://goldsilver.com/blog/corporate-d ... bt-crisis/

Yes corporate debt % to GDP is at a high. At 45%, it is only 5% higher than the 40% floor that has existed since the early 90's. In contrast, household debt to GDP went from about 70% in 2000 to about 100% in 2006/2007 (it is back down to about 80% now). Govt "net debt" has increased from around 30% GDP to about 80% GDP. The additional leverage caused by 5% of corp debt to GDP likely won't move the needle a lot.

It is somewhat logical that corporations would lock into more debt at low interest rates.

Corporations are sitting on record levels of cash, amounting to amount 10% of GDP, although it is concentrated with the largest companies. Some of that is probably due to companies hesitant to repatriate to US and to get taxed (although now more favorable with new tax law) - so better to borrow at 3% than to repatriate and formerly get taxed at 35%.

https://www.forbes.com/sites/timworstal ... 47c5153374

boglerdude
Posts: 628
Joined: Fri Jul 10, 2015 1:28 am
Contact:

Re: Corporate debt bubble?

Post by boglerdude » Sun Sep 23, 2018 12:50 am

> Govt "net debt" has increased from around 30% GDP to about 80% GDP

What does this mean and what are the consequences

Valuethinker
Posts: 35951
Joined: Fri May 11, 2007 11:07 am

Re: Corporate debt bubble?

Post by Valuethinker » Sun Sep 23, 2018 7:21 am

boglerdude wrote:
Thu Sep 20, 2018 12:27 am
Did bondholders get bailed out in ~2008 ?

Who ate most of the losses from the crisis
They did.

At least the GM ones did not (c. 10 cents on the dollar).

But bank bondholders did, generally. Ireland in particular. But also RBS, HBOS, Citi, AIG, FNMA & FMAC etc. Monte di Paschi di Sienna the latest example (at least for the small bondholders).

Regulators are emphatic that holders of debt instruments issued by financial institutions have gained higher returns than simply putting money on deposit. Therefore they knew there was higher risk. Therefore they will take pain.

Bondholders in future crises will be "bailed in". Converted into equity (at huge dilution) in the rescue of the bank.

If you look at how much of, say, a European corporate debt fund is, that is issued by financials, it's a recipe for a rough ride, come the next crisis.

Valuethinker
Posts: 35951
Joined: Fri May 11, 2007 11:07 am

Re: Corporate debt bubble?

Post by Valuethinker » Sun Sep 23, 2018 7:23 am

boglerdude wrote:
Sun Sep 23, 2018 12:50 am
> Govt "net debt" has increased from around 30% GDP to about 80% GDP

What does this mean and what are the consequences
I think that is net against financial assets governments hold.

It gets really complicated, and you can skew the numbers to make whatever argument you want, if you start to include paygo liabilities like US Social Security and Medicare. Your choice of discount rate can make that number seem overwhelming, or quite tolerable (Kotlikoff wrote a whole book to make it seem apocalyptic, which hinged on which discount rate you chose).

Suffice it to say it's clear it can be serviced, however the cost may be future tax rises and/or service cuts. Whether that is desirable and the correct mix of same takes us into politics. One side of the debate generally seems to feel that tax cuts that cause higher government borrowing are not a bad thing but too much spending by government is, the other side believes roughly the reverse.

Private sector debt has a much greater direct impact on economic output:

- it tends to be procyclical. When incomes & asset values are rising, people and companies borrow more -- their higher Interest Cover (income/ net interest), lower leverage (debt/ income) and lower gearing (net debt/ equity) ratios make more debt affordable. When recession hits, they then try to deleverage, magnifying the economic downside (if we all save more money, together, then there is downward pressure on spending, and thus on corporate profits & tax revenues, which makes companies cut back more, which increases downward pressure on spending (business is not there, people get laid off etc.)).

- those falls in asset values can themselves create recessions. As it did 2000-03 or 2008-09. For the same reason as above, falls in asset values lead to a desire to deleverage (reduce person debt to equity or corporate debt to equity ratios). That triggers asset sales which triggers lower asset values which triggers higher gearing ratios (debt/equity as equity falls) which triggers asset sales etc... that's really what Hyman Minsky was talking about, I think.

(EDIT: that I know of, Irving Fisher described this phenomenon first -- the debt liquidation cycle. He is remembered by history for "stocks have reached a new and permanently high level" before the Crash, but, in fact, he was a very talented financial economist, Fisher's relationship (or formula) that (1 + nominal) = (1+inflation)x (1 + real) for performance and for interest rates is one that we use every day when we think about financial markets.)
Last edited by Valuethinker on Sun Sep 23, 2018 12:21 pm, edited 2 times in total.

3funder
Posts: 712
Joined: Sun Oct 15, 2017 9:35 pm

Re: Corporate debt bubble?

Post by 3funder » Sun Sep 23, 2018 7:28 am

Investment-grade corporate debt accounts for 30% of my bond allocation; I sleep like a baby.

UpperNwGuy
Posts: 979
Joined: Sun Oct 08, 2017 7:16 pm
Location: Washington DC

Re: Corporate debt bubble?

Post by UpperNwGuy » Sun Sep 23, 2018 7:52 am

3funder wrote:
Sun Sep 23, 2018 7:28 am
Investment-grade corporate debt accounts for 30% of my bond allocation; I sleep like a baby.
Sounds to me like you own Total Bond. Me too.
Retiree with a pension and a 60/40 taxable portfolio: Total Stock + Total Int'l + Total Bond + Interm Term Tax Exempt.

3funder
Posts: 712
Joined: Sun Oct 15, 2017 9:35 pm

Re: Corporate debt bubble?

Post by 3funder » Sun Sep 23, 2018 8:50 am

UpperNwGuy wrote:
Sun Sep 23, 2018 7:52 am
3funder wrote:
Sun Sep 23, 2018 7:28 am
Investment-grade corporate debt accounts for 30% of my bond allocation; I sleep like a baby.
Sounds to me like you own Total Bond. Me too.
Indeed.

JBTX
Posts: 4034
Joined: Wed Jul 26, 2017 12:46 pm

Re: Corporate debt bubble?

Post by JBTX » Sun Sep 23, 2018 9:46 pm

Valuethinker wrote:
Sun Sep 23, 2018 7:23 am
boglerdude wrote:
Sun Sep 23, 2018 12:50 am
> Govt "net debt" has increased from around 30% GDP to about 80% GDP

What does this mean and what are the consequences
I think that is net against financial assets governments hold.

It gets really complicated, and you can skew the numbers to make whatever argument you want, if you start to include paygo liabilities like US Social Security and Medicare. Your choice of discount rate can make that number seem overwhelming, or quite tolerable (Kotlikoff wrote a whole book to make it seem apocalyptic, which hinged on which discount rate you chose).

Suffice it to say it's clear it can be serviced, however the cost may be future tax rises and/or service cuts. Whether that is desirable and the correct mix of same takes us into politics. One side of the debate generally seems to feel that tax cuts that cause higher government borrowing are not a bad thing but too much spending by government is, the other side believes roughly the reverse.

Private sector debt has a much greater direct impact on economic output:

- it tends to be procyclical. When incomes & asset values are rising, people and companies borrow more -- their higher Interest Cover (income/ net interest), lower leverage (debt/ income) and lower gearing (net debt/ equity) ratios make more debt affordable. When recession hits, they then try to deleverage, magnifying the economic downside (if we all save more money, together, then there is downward pressure on spending, and thus on corporate profits & tax revenues, which makes companies cut back more, which increases downward pressure on spending (business is not there, people get laid off etc.)).

- those falls in asset values can themselves create recessions. As it did 2000-03 or 2008-09. For the same reason as above, falls in asset values lead to a desire to deleverage (reduce person debt to equity or corporate debt to equity ratios). That triggers asset sales which triggers lower asset values which triggers higher gearing ratios (debt/equity as equity falls) which triggers asset sales etc... that's really what Hyman Minsky was talking about, I think.

(EDIT: that I know of, Irving Fisher described this phenomenon first -- the debt liquidation cycle. He is remembered by history for "stocks have reached a new and permanently high level" before the Crash, but, in fact, he was a very talented financial economist, Fisher's relationship (or formula) that (1 + nominal) = (1+inflation)x (1 + real) for performance and for interest rates is one that we use every day when we think about financial markets.)

https://www.cbo.gov/publication/53651

As to govt debt, yes it is hard to delve too much into this one without getting into forbidden territory.

I only really present it as a point of comparison - it has increased 40-50% over 20 years. Household debt went up around 30% over 7 years. Corporate debt going from 40-45% by itself probably isn't by itself going to be a huge factor.

I only present net (sometimes referred to as public, but not consistently ) because it backs out what the govt owes itself, ie the social security and medicare fund. Otherwise is would be gross debt of just over 100% of GDP. Net debt is a more accurate measure of what is owed to outside parties currently. Gross debt is arguably less meaningful, but it is an indication of the potential trend - as those inter govt debts will ultimately become external obligations down the road.

Net debt has been higher in history, post WWII it was well over 100%, but after a major world war that is kind of to be expected. Japan is over 200% of GDP, and most developed nations have a higher debt to GDP than the US. So whether 80% net is good or bad or neither is highly subjective.

I think what is significant is we are about to run deficits of around 5+% of GDP, in relative peacetime, with a strong economy. That hasn't happened in a long time (maybe ever?) - add that and future unfunded obligations of social security and medicare, and things could get interesting. Throw in future recessions or significantly higher interest rates, and, well, you get the picture.

https://www.cbo.gov/publication/53781
Outcomes If Certain Changes Scheduled in Law Did Not Occur
In CBO’s baseline projections, deficits in the latter half of the decade, though quite large, are not trending upward relative to the size of the economy. That pattern occurs in large part because CBO’s projections reflect the assumption that substantial tax increases and spending cuts will take place as scheduled under current law.

If those changes did not occur and current policies were continued instead, much larger deficits and much greater debt would result: The deficit would grow to 7.1 percent of GDP by 2028 and would average 6.3 percent of GDP from 2023 to 2028, CBO estimates, compared with 4.9 percent in the baseline. With cumulative deficits of $15.0 trillion over the projection period, debt held by the public under that alternative fiscal scenario would reach 105 percent of GDP by the end of 2028, an amount that has been exceeded only one time in the nation’s history. Moreover, the pressures that are projected to contribute to that rise would accelerate and drive up debt even more in subsequent decades.

bhsince87
Posts: 1813
Joined: Thu Oct 03, 2013 1:08 pm

Re: Corporate debt bubble?

Post by bhsince87 » Sun Sep 23, 2018 10:00 pm

Since at least 1971, debt is money. As the economy grows, it is necessary that debt grows to support it, or else we will fall into deflation.
Retirement: When you reach a point where you have enough. Or when you've had enough.

User avatar
nedsaid
Posts: 10313
Joined: Fri Nov 23, 2012 12:33 pm

Re: Corporate debt bubble?

Post by nedsaid » Sun Sep 23, 2018 10:54 pm

Tideout wrote:
Tue Sep 18, 2018 2:00 pm
Hello,

Recently, there was an article in USA Today about corporate debt, being the new bubble/bust. I just wonder about the soundness of balance sheets out there. Possible dividend and buyback cuts? Opinions? Random walker.......I need that Warren Buffett bikini analogy!!
When interest rates were very low, companies issued bonds to buy back stocks. In many cases, the yields on the newly issued bonds were less than the yields of the stocks being bought back. This would actually improve the cash flow of the company. I also want to point out that companies can also issue stock to retire debt. This can go both ways.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 10313
Joined: Fri Nov 23, 2012 12:33 pm

Re: Corporate debt bubble?

Post by nedsaid » Sun Sep 23, 2018 10:55 pm

bhsince87 wrote:
Sun Sep 23, 2018 10:00 pm
Since at least 1971, debt is money. As the economy grows, it is necessary that debt grows to support it, or else we will fall into deflation.
Yes, when President Nixon completely took us off the Gold Standard, the currency was allowed to float, no longer being pegged in any way to the price of Gold.
A fool and his money are good for business.

boglerdude
Posts: 628
Joined: Fri Jul 10, 2015 1:28 am
Contact:

Re: Corporate debt bubble?

Post by boglerdude » Mon Sep 24, 2018 7:59 am

> Since at least 1971, debt is money. As the economy grows, it is necessary that debt grows to support it

But some debt will never be repaid, so it's misleading to call it debt? eg, if I lend the gov 30k, they'll eventually have to give it back. If the Fed loans the gov 30k, they can loan it/roll it for 500 years, essentially it will never be paid back. Is that right? So what number do you look at to understand how much will actually be paid back?

User avatar
Phineas J. Whoopee
Posts: 7470
Joined: Sun Dec 18, 2011 6:18 pm

Re: Corporate debt bubble?

Post by Phineas J. Whoopee » Mon Sep 24, 2018 9:50 am

boglerdude wrote:
Mon Sep 24, 2018 7:59 am
> Since at least 1971, debt is money. As the economy grows, it is necessary that debt grows to support it

But some debt will never be repaid, so it's misleading to call it debt? eg, if I lend the gov 30k, they'll eventually have to give it back. If the Fed loans the gov 30k, they can loan it/roll it for 500 years, essentially it will never be paid back. Is that right? So what number do you look at to understand how much will actually be paid back?
Congress, which created the Fed, made it illegal for the Fed to lend money directly to the federal government.

PJW

riverguy
Posts: 430
Joined: Sun May 23, 2010 10:33 pm

Re: Corporate debt bubble?

Post by riverguy » Mon Sep 24, 2018 10:21 am

Phineas J. Whoopee wrote:
Mon Sep 24, 2018 9:50 am
boglerdude wrote:
Mon Sep 24, 2018 7:59 am
> Since at least 1971, debt is money. As the economy grows, it is necessary that debt grows to support it

But some debt will never be repaid, so it's misleading to call it debt? eg, if I lend the gov 30k, they'll eventually have to give it back. If the Fed loans the gov 30k, they can loan it/roll it for 500 years, essentially it will never be paid back. Is that right? So what number do you look at to understand how much will actually be paid back?
Congress, which created the Fed, made it illegal for the Fed to lend money directly to the federal government.

PJW
The banks gotta get their cut too.

Post Reply