A Decade After the Financial Crisis, Corporate Finance Must Contend with These New Ticking Debt Time Bombs – By Larry Light (Fortune) / Dec 29 2019
“Only when the tide goes out do you discover who’s been swimming naked.”
In today’s frenetic debt market, Warren Buffett might want to add a corollary to his oft-repeated comment on the trouble that befalls weak companies when recessions come.
That is, there are a lot more companies swimming naked today.
Thanks to razor-thin interest rates over the past decade, U.S. companies have doubled their borrowing since 2008 to around $10 trillion, with much of the new debt in the form of high-yield bonds given to weak companies, known as junk bonds.
So far, this gorging on debt has led to relatively few defaults, which happens when debt issuers can’t pay the bond’s interest or the principal as it comes due. But once the next recession rolls in—or when the tide goes out, in the Oracle of Omaha’s words—the riskiest junk bonds likely will be in trouble.
And this time around, the danger to investors doesn’t end with junk. Today, two other tentacles of post-crisis corporate finance are making the debt threat worse: “lev loans” and looser debt-issuing rules.
Continue to article: https://fortune.com/2019/12/29/financial-crisis-corporate-debt-lev-loans-covenants/
