U.S. companies are borrowing more than ever as continuously low interest rates make it more appealing than issuing equity. With the increase in total leverage, however, comes a decline in the quality of some of that new debt as the higher cost of borrowing reflects current debt amounts. On the other side of the trade, investors are more than willing to travel down the quality spectrum to get what yield they can.
The bank is open: As of March 31, non-financial businesses had more than $10.4 trillion in outstanding debt securities and loans. That number is 1.6 times that of debt in 2008 and $600 billion more than at the start of 2020.
Junk store: Outstanding high-yield debt reached $2.1 trillion by mid-June, about one-fifth of all U.S. corporate debt. Since 2015, high-yield debt has grown at an average annual rate of 29%, compared with investment-grade growth of 19.5%.
Quality control: The distribution of data ratings has skewed toward lower-quality bonds with fewer bonds being rated above A and more rated BB+ and below. The increase in the BBB range shows a fall in quality in the investment-grade class.
Payback: Companies with junk debt have seen balance-sheet leverage jump in recent years faster than their better-rated peers. Earnings for the low-rated companies have also declined relative to their debt, threatening their ability to meet bond obligations.
Sources: Bloomberg LP, Federal Reserve Bank of St. Louis
