Corporate debt bomb fears rise as coronavirus outbreak worsens

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The coronavirus panic could threaten a mountain of $ 10 trillion in corporate debt, triggering a cycle of layoffs and corporate spending cuts that would hit the economy just as some analysts warn of a recession.

Financial markets are already showing major signs of stress. Investors demand higher interest payments in exchange for loans to less creditworthy companies; some companies delay their planned bond sales until Wall Street calms down; and the rating agencies are moving towards downgrading the rating of certain borrowing companies.

The massive debt surge includes a dramatic increase in the borrowing of companies of the lowest quality, those rated just one level above “trash”. Over $ 1,000 billion in “leveraged loans,” a type of risky bank loan to indebted companies, is a potential second flashpoint.

Watchdogs, including the Federal Reserve, have warned for years that excessive borrowing by companies, including some with below-par credit ratings, could potentially create a hole in the U.S. economy. Now, as Wall Street grapples with a global epidemic, debt scares show how investors are reassessing risks they overlooked during the long economic expansion.

“It’s a big concern,” said Ruchir Sharma, Morgan Stanley’s chief global strategist. “We are dealing with the unknown. But given the huge increase in leverage, the system is fragile and vulnerable.”


Energy companies that have borrowed heavily in recent years could be the first to suffer, due to the oil price war between Saudi Arabia and Russia. Falling oil prices, while good news for consumers, could reach levels that will prevent companies in the U.S. shale industry from covering their costs.

On Monday, investors hit some energy companies that have major bonds outstanding. Shares of Halliburton, which has more than doubled its total debt to $ 11.5 billion since 2012 despite falling income and profits, have lost 38% of their value.

The oil services company raised $ 1 billion last week by selling investors 10-year bonds bearing interest at 2.9%. Halliburton said he plans to use the proceeds to pay off existing debt. Over the next six years, he will have to repay $ 3.8 billion in debt.

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