Moody’s Issue Report Citing Corporate Debt Levels Vulnerability

Downgrades of corporate debt levels are rising in Corporate America as interest rates remain stable

Moody issues a report that adds to the increasing sobering news facing corporate America. As word of earnings forecasts being reduced pervade, there is concern regarding corporate debt levels. Increased credit downgrades do not bode well for current market trends.

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Since the start of 2019, Moody’s data claims that the amount of credit downgrades in corporate America has outpaced the number of upgrades. The current figure stands at 94 downgrades versus 75 upgrades, establishing a ratio of 0.77. This news appears to show indications of a trend as last year’s fourth quarter also had mounting downgrades and a ratio of 0.79.

U.S non-financial companies have managed to possess almost four times the earnings before interest and taxes to cover interest expense, as indicated by a Federal Reserve Study. Despite this, corporate debt levels have reached a staggering 70% of gross domestic product.-A figure higher than 2007’s, before the great recession struck.

An increasing number of corporate issues are rated as junk or near junk status. Data from Moody’s Capital Markets Research shows a record $2.96 trillion issues are rated Baa. This is the level just before the high-yield mark. Current issues at this level make up 48.5% of all investment-grade bonds. The condition doesn’t appear too periling as year-end defaults for 2018 total a lowly 2.4%. Nevertheless, this seemingly calm situation can go bad very quickly. During 2007, right before the major financial collapse, junk bond default rates were at this current corporate debt levels. By the following year, default rates rose to a jaw-dropping 15%.

The corporate debt levels data indicates that there is an increased appetite for corporate America to take advantage of the current low-interest environment. As guidance on earnings continues to be tempered for 2019, corporate America appears to be doubling down on interest rates remaining stable.