Companies have taken advantage of low borrowing costs and high demand to sell more debt, allowing themselves to drop down the credit-ratings spectrum.
Source: Financial Times
Companies across the globe took advantage of lower borrowing costs to sell a record amount of bonds in 2019, prompting renewed concerns among policymakers about soaring levels of debt.
Just over $2.5tn of corporate bonds were sold over the year, inching past the previous record set in 2017, according to data from Dealogic.
Issuance was boosted by supportive moves from major central banks, which reversed course and lowered interest rates, helping to cut the costs of borrowing for all sorts of companies.
The Federal Reserve cut rates by a total 0.75 percentage points over 2019, erasing much of the 1-point rise the US central bank administered over the previous year. The European Central Bank also reduced rates and renewed its commitment to buying bonds in a bid to help revive the economy.
“Central bank policy has played a significant role in what’s happening,” said Asif Sherani, a managing director in debt syndicate at HSBC in London. “It is clearly contributing to the surge of corporate issuance.”
The record debt sales highlight tensions between policymakers’ desire to keep the cost of borrowing low in an attempt to stimulate economic growth, while at the same time sounding the alarm over rising corporate indebtedness.
The World Bank warned in a report last week that the surge of debt issuance in the wake of the financial crisis has been the “largest, fastest and most broad-based wave of debt accumulation yet.”
The Washington, DC-based development bank said that this could be particularly perilous for emerging market economies.
Last week the Federal Reserve Bank of New York reiterated concerns over increasing amounts of debt issued by lower-rated companies, which could come under pressure should economic conditions worsen. As interest rates plummeted, the amount of negative yielding debt reached a peak of over $17tn in August of last year, pushing investors to buy riskier corporate debt in order to bolster returns.
At the same time companies have taken advantage of low borrowing costs and high demand to sell more debt, allowing themselves to drop down the credit-ratings spectrum.
“We are still seeing the feelgood factor in the markets as a result of continuing accommodative central bank policies, which help to make funding costs so attractive that companies are continuing to issue historically high levels of debt,” said Marco Baldini, head of European bond syndicate at Barclays.