U.S. corporations have shifted their capital structures more in favor of debt financing in lieu of equity as the cost of borrowing declined in the years following the Great Recession. The market value of debt and equity have grown exponentially while equity's share of capital financing has fallen, primarily due to mergers and buybacks.
Lever up: The weighted average ratio of U.S. companies'* debt to total capital increased since 2008 as the cost to borrow money fell across all investment-grade ratings.
Quantity vs. quality: As rates stayed lower for longer, so did the overall quality of the investment-grade debt being sold. BBB-rated issues make up about 50% of all investment-grade debt, up from about 33% pre-recession.
Fewer shares: Companies have been reducing the number of equity shares outstanding since 2013. Over the past five years, the total number of shares outstanding declined by 4.9 billion, including a net decline of 2.5 billion in 2018. S&P 500 companies bought back $3.46 trillion in stock since 2013.
Chicken or egg? Corporate pension plans have led institutional investors in demand for investment grade debt as liability-driven investing portfolios became more popular, with an average fixed-income allocation of 44% in 2018, up from 34% in 2010.
*S&P 500 constituents as of March 31. Sources: Bloomberg LP, Morningstar Inc.