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BUSINESS Saturday 15 december 2018
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The debt threat: Business debt, and worries about it, are up

By STAN CHOE GE, with about $115 billion for companies, which hurts egory of bond funds to an or relatively weak finances.
Associated Press in total borrowings, is part their ability to repay their average loss of 4.7 percent. These loans have been
NEW YORK (AP) — Hom- of a growing group of com- debts, which could lead to In his speech, Powell said popular with investors in re-
eowners appear to have cent years because they
learned the lesson of the often have what are called
Great Recession about not floating rates, so they pay
taking on too much debt. more in interest when rates
There is some concern that are rising.
Corporate America didn’t Paul Massaro, portfolio
get the message. manager for floating-rate
For much of the past de- strategies at T. Rowe Price,
cade, companies have says he’s still positive about
borrowed at super-low in- this market in general. But
terest rates and used the his team of analysts has
money to buy back stock, been finding more warn-
acquire other businesses ing flags in offerings, where
and refinance old debt. the terms of the deal may
The vast majority of com- be overly friendly to bor-
panies are paying their rowers and allow them to
bills on time, thanks in large amass more debt than
part to profits that have they should.
surged since the economy It’s gotten to the point
emerged from the Great where Massaro is partici-
Recession nine and a half pating in about 15 percent
years ago. of all offerings today, down
But with interest rates ris- from 30 percent a few
ing and U.S. economic years ago.
growth expected to slow Investors have largely been
next year, worries are build- willing to stomach higher
ing from Washington to risk because they’ve been
Wall Street that corporate starved for income follow-
debt is approaching po- This August 2010 file photo shows a sign for Moody’s Corp. in New York. ing years of very low inter-
tentially dangerous levels. Associated Press est rates.
U.S. corporate debt has As a result, some bonds
grown by nearly two-thirds panies concentrated at the even more selling. he doesn’t see the weaker that by many accounts
since 2008 to more than lower end of investment- Even the chairman of the parts of the corporate debt look like risky junk bonds are
$9 trillion and, along with grade. Other high-profile Federal Reserve has taken market undermining the fi- trading at prices and yields
government debt, has bal- names in this area within a notice of the rise in corpo- nancial system in the event that should be reserved for
looned much faster than few notches of junk grade rate debt. Jerome Powell of an economic downturn, higher-quality bonds, say
other parts of the bond include General Motors said in a recent speech that at least “for now.” Tom McCauley and Yoav
market. Investors are most and Verizon Communica- business borrowing usually Other investors see the Sharon, who run the $976.3
concerned about compa- tions. They make up nearly rises when the economy market’s growing worries as million Driehaus Active In-
nies at the weaker end of 45 percent of the Bloom- is growing. But he said it’s premature. Companies are come fund. To take ad-
the financial-strength scale berg Barclays Credit index, concerning that, over the still making record profits, vantage, they’re increas-
— those considered most more than quadruple their last year, the companies which allow them to repay ingly “shorting” corporate
likely to default or to get proportion during the early increasing their borrowing their debts, and consumer bonds, which are trades
downgraded to “junk” sta- 1970s. the most are those already confidence is still high. that pay off if the bonds’
tus should a recession hit. Credit-rating agencies say with high debt and interest “There is a story out there prices fall.
“I’ve been more worried downgrades for GE, GM burdens. that there’s a recession They recently began short-
about the bond market or Verizon aren’t imminent. To be sure, many bond coming very soon, and you ing bonds of a packaged
than the equity market,” But the concern for them, fund managers say com- had better head for the goods company with a
said Kirk Hartman, global and broadly for this swell- panies were smart to bor- hills,” said Warren Pierson, “BBB” rating that borrowed
chief investment officer ing group of businesses, is row hefty sums at low rates. deputy chief investment of- to help pay for a large ac-
at Wells Fargo Asset Man- if profits start falling or the And at the moment, there ficer at Baird Advisors. “We quisition, for example. A
agement. “I think at some economy hits a recession. are no outward signs of think that’s a pretty early “BBB” rating is at the lower
point, all the leverage in If those companies do drop danger. The default rate call. We don’t see reces- end of investment grade,
the system is going to rear below investment grade, for junk-rated corporate sion on the horizon.” and a drop to “BB” would
its ugly head.” they’d be what investors bonds was 2.6 percent last That’s why he and Mary El- send it into junk status.
Consider General Electric, call “fallen angels,” and month, which is lower than len Stanek, who run bond With so much debt, Mc-
which said in early Octo- they can trigger waves of the historical average, and mutual funds at Baird, Cauley and Sharon believe
ber it would record a big selling. Many mutual funds S&P Global Fixed Income haven’t given up on corpo- that it’s at risk of getting
charge related to its strug- and other investors are re- Research expects it to fall rate bonds, even if they’ve downgraded to junk and is
gling power unit, one that quired to own only high- in upcoming months. moderated how much not paying enough in yield
ended up totaling $22 bil- quality, investment-grade Even if the economy does they own. to compensate for its risk.
lion. Both Moody’s and bonds — so they would fall into a recession, fund But critics see some echoes “As we get into the later
Standard & Poor’s subse- have to sell any bonds that managers say losses won’t of the financial crisis in to- stages of the cycle, the sins
quently downgraded GE’s get cut to junk. be to the same scale as day’s loosening lending of the early stages of the
credit rating to three notch- The forced selling would 2008 when the financial standards. Consider lever- cycle tend to start show-
es above “speculative” lead to a drop in bond crisis sent the S&P 500 to a aged loans, a section of the ing up,” said Sharon. “We
grade, which indicates a prices, which could result drop of nearly 37 percent market that makes loans to think that’s where we are
higher risk of default. in higher borrowing costs and the most popular cat- companies with lots of debt today.”q