WASHINGTON (AP) — A gyrating stock market is seizing headlines as the coronavirus threatens corporate profits and economic growth. Yet it’s in the normally temperate bond market, where companies go to borrow money, where the gravest dangers may lurk.
Investors fear that businesses that have borrowed heavily, especially energy, airline and cruise line companies, will struggle to pay their debts as customers cancel trips and hunker down at home. The shutdown of normal business is shrinking demand for energy in particular, sending oil prices sinking and intensifying pressure on indebted oil-and-gas production firms.
The numbers are enormous.
Having binged on borrowing, companies that are outside the financial sector owe USD9.6 trillion in the United States (US) — up more than 50 per cent in a decade. Worldwide, companies have issued USD13 trillion in bonds, according to the Organization for Economic Cooperation and Development (OECD). That’s twice what they owed in the financial crisis year of 2008. Corporate debt in China alone has soared from virtually nothing to USD590 billion.
Add in what companies owe banks and other creditors, and their debts come to USD75 trillion worldwide, up from USD32 trillion in 2005, the Institute of International Finance said.
Struggling to meet debt payments under the pressure of a virus-induced economic slump, companies are more likely to lay off workers, delay investments and cut costs. All of which could deepen any economic downturn.
Still, optimists note that banks are far healthier than they were in 2008, when millions of homeowners were saddled with mortgages they couldn’t pay. And central banks are striving to limit the damage. The Federal Reserve has stepped up its daily short-term lending to help businesses meet short-term financing needs such as meeting payrolls.
“I don’t think we have anything shaping up like 2008 or 1929, particularly in the US,’’ said Harvard economist Kenneth Rogoff, who has written about the history of financial crises.
Over the past decade, though, companies have borrowed heavily to capitalise on record-low rates. Many have used the proceeds not to hire or expand but to issue dividends to shareholders or to buy back their own stock.
The strain is showing. In the US, the bonds of such iconic names as Macy’s and Kraft Heinz have been downgraded to junk status.
Bonds for cruise lines have sunk along with their stocks. Standard & Poor’s Global Ratings warned that its rating for Carnival Corp could be cut to its lowest level before junk. Carnival’s Diamond Princess and Grand Princess ships were badly hit by the virus.
So far, airlines aren’t “at immediate risk,” said Philip Baggaley, an analyst at S&P, adding: “But this is a new virus and more widespread one than previous cases such as SARS and swine flu, so it’s hard to predict beyond the near term, and it could certainly be worse than current expectations.”
Companies had been selling tens of billions in new bonds each month. That pace ground to halt in late February. Companies started canceling sales as investors balked at buying corporate bonds. In the last week of that month, no US company sold new bonds, according to S&P. That’s virtually unheard of outside of a holiday or an emergency like the financial crisis.
The cancelled sales coincide with perilous times for many companies. Oxford Economics has warned that nearly USD4 trillion of US corporate bonds will come due within five years — a “massive wall of maturities,” it calls it.