Global NFC debt now at 93% of GDP vs. 75% before 2008 financial crisis: IIF COVID-19 fears prompt sharp downgrades to corporate earnings estimates, raising the risk of fallen angels and fire sales.
As the world succumbs to a global pandemic and oil prices go sporadic, corporate earnings become almost sky high relative to earnings, while prospects deteriorate to almost $75 trn, which all culminates to the fast growing mountain of global corporate debt (ex-financials) currently stands at around 93% of global GDP vs 75% in the run up to the 2008 global financial crisis, according to the Institute of International Finance (IIF) in its latest report. COVID-19 fears prompt sharp downgrades to corporate earnings estimates, raising the risk of fallen angels and fire sales. The IIF mentioned that as high corporate debt becomes increasingly exposed to refinancing and slowling global growth, firm-level data highlights a rapid buildup in corporatesector leverage in many mature markets (relative to earnings) starting from 2018. The IIF said some of the highest debt burdens are in sectors with weak and volatile earnings profiles. It pointed out that if analysts continue to mark down earnings forecasts as the impact of COVID-19 becomes clearer, debt-to-EBITDA (earnings before interest depreciation and amortisation) ratios could surge, pushing credit spreads even higher. Just since mid-February alone, high yield spreads have gone up from 300bp to over 650bp. When talking about the oil and gas industry, IIF says that it's in double trouble as COVID-19 causes sharp drops in energy prices, leaving companies at high risk of default. "Although the average level of debt for energy sector firms is fairly low relative to other industries, many energy companies have limited cash buffers, making it harder for them to ride out prolonged disruptions from unexpected shocks. This is especially true in lower echelons," the IFF continued. The IIF expressed a fear of falling, saying that given already high levels of debt relative to earnings (i.e. weak fundamentals), there is clearly a risk of abrupt and widespread downgrades from the sizeable BBB category to junk status if more pessimistic forecasts of the COVID-19 impact materialise. "The universe of tradable non-financial corporation (NFC) bonds has more than doubled since 2008, to nearly $12 trn,"the IIF mentioned. Concerning debt vulnerabilities in emerging market (EM), the IIF said that stronger growth and some deleveraging in recent years have brought down EM non-financial corporation debt to GDP to 94% in third quarter (Q3) 2019, from an all-time high of 98% in 2016. "However, these are still very high levels, and vulnerabilities persist especially in countries with heavy reliance on foreign exchange debt and limited policy space," the IFF continued. It assured that given the importance of state-owned-enterprises in the EM corporate sector, prolonged economic disruption from COVID-19 could also accelerate the State-Owned Enterprises SOE-driven debt buildup.
