The Ugly End to a Seven-Year Borrowing Binge
Casey Daily Dispatch
The bond market just flashed another warning sign...
Many professional investors watch the bond market, which is about 50% bigger than the stock market, for clues about the rest of the economy. The bond market is where companies and countries borrow money. If a country or an industry is cracking, it usually shows up in the bond market first.
Last month, we told you about a key “spread” that was widening in the bond market. We explained why this pointed to trouble ahead. Now the bond market is giving us another reason to think the U.S. economy is weakening…
• Downgrades to corporate credit ratings are at a six-year high...
A credit rating measures a borrower’s financial health. A company with a low credit rating will often struggle to repay debt.
Credit rating agencies lower a company’s rating when they think the company’s financial health is getting worse. So far this year, there have been more downgrades than in any year since the Great Recession. The Wall Street Journal explains:
Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009…with just 172 upgrades.
Energy and commodity companies make up a large slice of these downgrades. Last week, Business Wire said that energy and commodity companies accounted for 40% of the downgrades during the third quarter.
Casey readers know the Bloomberg Commodity Index, which tracks 22 different commodities (including oil and natural gas), recently hit its lowest point since 1999. The recent crash in energy prices is a big reason why. Oil is currently down 55% from its 2014 high. And natural gas is down 61%.
Weak commodity prices are translating into dramatically lower profits for many energy and commodity companies. This is a big reason for the recent credit-rating downgrades in the sector.
Ratings agencies have also downgraded several big companies outside of the energy sector…
Standard & Poor’s cut Mattel’s (MAT) credit rating in January. S&P is concerned the toymaker is losing market share. And in March, Moody’s downgraded McDonald’s (MCD) after the fast food giant announced plans to borrow a lot of money to pay shareholders.
• U.S. companies have been on a seven-year borrowing binge...
Casey readers know the Federal Reserve dropped its key interest rate to effectively zero in 2008…and left it there. The past seven years of incredibly low interest rates have allowed for all kinds of reckless borrowing.
U.S. companies have issued $9.3 trillion in new debt since the financial crisis. That includes $1.4 trillion in bonds last year, according to the Securities Industry and Financial Markets Association. This was an all-time high, but the record probably won’t hold for long…
Through September of this year, U.S. corporations had already issued $1.2 trillion in bonds. That’s an 8.4% increase over the same period last year.
This excessive amount of debt is hurting U.S. companies. Last week, The Wall Street Journal said the balance sheets of big U.S. companies are weaker than they were before the 2007-8 financial crisis.
According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization [Ebitda] for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.
• U.S. companies are also paying out more than they earn...
Last year, companies in the S&P 500 spent 95% of their profits on share buybacks and dividends. That figure hit 104% in the first quarter of 2015, according to Bloomberg Business.
Bloomberg Business also says the last time this happened was just months before the 2008 financial crisis hit.
Shareholder payouts previously rose above 100 percent of operating earnings in the second quarter of 2007. Two quarters later, the figure peaked at 156.5 percent of profit -- and the bull market ended.
This means companies are giving cash to shareholders instead of using the cash to grow their businesses. Every dollar a company spends on dividends and share buybacks is a dollar it doesn’t spend on research and development, new factories, equipment, etc.
Casey Daily Dispatch
The bond market just flashed another warning sign...
Many professional investors watch the bond market, which is about 50% bigger than the stock market, for clues about the rest of the economy. The bond market is where companies and countries borrow money. If a country or an industry is cracking, it usually shows up in the bond market first.
Last month, we told you about a key “spread” that was widening in the bond market. We explained why this pointed to trouble ahead. Now the bond market is giving us another reason to think the U.S. economy is weakening…
• Downgrades to corporate credit ratings are at a six-year high...
A credit rating measures a borrower’s financial health. A company with a low credit rating will often struggle to repay debt.
Credit rating agencies lower a company’s rating when they think the company’s financial health is getting worse. So far this year, there have been more downgrades than in any year since the Great Recession. The Wall Street Journal explains:
Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009…with just 172 upgrades.
Energy and commodity companies make up a large slice of these downgrades. Last week, Business Wire said that energy and commodity companies accounted for 40% of the downgrades during the third quarter.
Casey readers know the Bloomberg Commodity Index, which tracks 22 different commodities (including oil and natural gas), recently hit its lowest point since 1999. The recent crash in energy prices is a big reason why. Oil is currently down 55% from its 2014 high. And natural gas is down 61%.
Weak commodity prices are translating into dramatically lower profits for many energy and commodity companies. This is a big reason for the recent credit-rating downgrades in the sector.
Ratings agencies have also downgraded several big companies outside of the energy sector…
Standard & Poor’s cut Mattel’s (MAT) credit rating in January. S&P is concerned the toymaker is losing market share. And in March, Moody’s downgraded McDonald’s (MCD) after the fast food giant announced plans to borrow a lot of money to pay shareholders.
• U.S. companies have been on a seven-year borrowing binge...
Casey readers know the Federal Reserve dropped its key interest rate to effectively zero in 2008…and left it there. The past seven years of incredibly low interest rates have allowed for all kinds of reckless borrowing.
U.S. companies have issued $9.3 trillion in new debt since the financial crisis. That includes $1.4 trillion in bonds last year, according to the Securities Industry and Financial Markets Association. This was an all-time high, but the record probably won’t hold for long…
Through September of this year, U.S. corporations had already issued $1.2 trillion in bonds. That’s an 8.4% increase over the same period last year.
This excessive amount of debt is hurting U.S. companies. Last week, The Wall Street Journal said the balance sheets of big U.S. companies are weaker than they were before the 2007-8 financial crisis.
According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization [Ebitda] for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.
• U.S. companies are also paying out more than they earn...
Last year, companies in the S&P 500 spent 95% of their profits on share buybacks and dividends. That figure hit 104% in the first quarter of 2015, according to Bloomberg Business.
Bloomberg Business also says the last time this happened was just months before the 2008 financial crisis hit.
Shareholder payouts previously rose above 100 percent of operating earnings in the second quarter of 2007. Two quarters later, the figure peaked at 156.5 percent of profit -- and the bull market ended.
This means companies are giving cash to shareholders instead of using the cash to grow their businesses. Every dollar a company spends on dividends and share buybacks is a dollar it doesn’t spend on research and development, new factories, equipment, etc.