The OECD has warned that corporate debt has reached a record high at a time when credit quality is poor, and that this could have an impact on monetary policy.
According to an OECD study on corporate bond market trends, corporate bond borrowing among non-financials increased by $2.1 trillion in 2019, beating the previous record set in 2016 and bringing the global total to an all-time high of $13.5 trillion.
The report also raised concerns about the quality of these bonds, and said: “Compared with previous credit cycles, today’s stock of outstanding corporate bonds has lower overall credit quality, higher payback requirements, longer maturities and inferior covenant protection. These are features that may amplify the negative effects that an economic downturn would have on the non-financial corporate sector and the overall economy.”
It noted that credit rating systems and the low interest rate environment mean many corporates have been able to increase leverage ratios and still maintain BBB ratings, with BBB-rated bonds now making up 52 percent of all new investment-grade bond issuance. The OECD said there is a risk of a major migration from investment grade to non-investment grade status in the case of a business downturn.
The OECD noted that in the lead-up to the 2008 financial crisis, non-financial companies raised significant amounts of debt, a trend that has continued since. Average annual issuance between 2008 and 2019 has been $1.8 trillion, more than double the $879 billion average from 2000 to 2007.
It further noted that bond issuance had declined in 2018 after the US Federal Reserve made its ninth successive rise in interest rates, but had bounced back in 2019 after the Fed cut rates for the first time since 2008.
Non-investment grade bond issuance has also been historically high. In every year since 2010, around 20 percent of all bonds issued have been non-investment grade, reaching 25 percent in 2019 – the longest period issuance has been so high since 1980. The OECD said this indicates that default rates in the next downturn could be much higher than during previous credit cycles.