by ShareAmerica, 2014

According to a Discussion paper published by the McKinsey Global Institute in June 2018, corporate bond issuance has increased 2.5 times over the past ten years. In a departure from the past the Institute notes that a large share of the growth in corporate debt has come from developing countries, and in particular China.
The total world-wide debt of non-financial corporations, including bonds and loans, has more than doubled over the past decade, growing by USD 37 trillion to reach USD 66 trillion in 2017, or 92 percentage points of global GDP.

No wonder that investors are believing that the next crisis must come from this excess.

Recently, Paul Tudor Jones, a hedge-fund investor, was in the news as he said he’s stress-testing his portfolio of corporate debt because he expects a tumultuous road ahead on the back of the Federal Reserve’s apparent commitment to normalizing interest rates and buttressed by corporate tax cuts from the Trump administration.
Jones said he believes that bonds and stocks are overvalued in an environment that had been underpinned by easy-money policies from central banks.

He’s not alone.

The Treasury Department’s Office of Financial Research called the overall threat to financial stability as “medium” in its recent annual report.
From a corporate debt perspective, General Electric (GE) seems to confirm the message ushered by markets.
GE share price has come down by over 50% over the last 12 months; it is no more part of the Dow Jones Industrial. GE´s total debt for the reported year 2017 is some USD 135bn. Its net revenue was relatively stable with some USD 120bn the last years.
Recently, concerns about GE’s financial strength have again been increasing as its troubled power equipment division has slumped into losses. Despite a cut in the quarterly dividend from 12 cents to 1 cent announced last month, the credit rating agencies Moody’s and Fitch followed S&P in downgrading GE by two notches.
The Financial Times noted that the yield of a USD 5.6bn GE perpetual debt jumped to a new high of 13.1 per cent, while an USD 11.4bn bond maturing in 2035 climbed to 6.19 per cent. The chief investment officer of Guggenheim Partners, indicated that the GE bond sell-off could be a canary in a coal mine for the broader bond market, saying on Twitter: “The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.

GE´s CEO, Larry Culp, who took over at the ailing company at the start of October 2018, said in an interview with CNBC that the company had “plenty of opportunities” to sell businesses, and highlighted its healthcare unit and its stake in the oilfield services group Baker Hughes as potential ways to “generate real cash”
In general, GE is only one victim of cheap debt which has let to many excesses. Here Paul Tudor Jones has a point: excesses occur if markets natural pricing powers cannot take place. Only the future will tell if the consistent slide of GE was the Minsky moment for corporate debt. If so, other sectors would follow, as more than USD 2 trillion of debt needs refinancing over the next two years. Especially selected Private Equity operators are surfing these waves of cheap debt. As the FT notes, the deals may not yet be quite as large as those in the last buyout bubble that blew up spectacularly a decade ago, such as the $44bn buyout of energy company TXU that ended in one of the biggest bankruptcies on record. But in one respect at least, 2007 is back: today’s deals are once again fuelled by supersized portions of cheap debt, with few strings attached…