‘Crexit’ could follow Brexit as corporate debt swells, warns S&P

The global corporate debt load, which stood at US$51.4 trillion last year, will balloon further to US$62 trillion by 2020, predicts credit ratings agency (CRA) Standard & Poor’s.

In their report, S&P analysts David Tesher, Paul Watters and Terry Chan comment: “Governments globally are persisting with monetary expansion to support economic growth and prop up inflation, to the detriment of credit quality, particularly for over-indebted Chinese corporates and US leveraged borrowers.”

Their base-case scenario projects global corporate credit demand of US$62 trillion over 2016-2020, with new debt representing two-fifths of the total and refinancing the rest. Outstanding debt over the same period would expand by half to US$75 trillion, with China’s share rising to 43% from 35%.

The latest projected debt demand figure of US$62 trillion comprises US$24 trillion in new debt and US$38 trillion refinancing. It compares with an earlier estimate a year ago, in which S&P estimated a total of US$57 trillion outstanding for the period 2015 to 2019.

The three authors warn of what they dub a forthcoming ‘Crexit’ to parallel Brexit as “heightened sensitivity to unexpected developments” – like the recent UK referendum in which voters supported an exit from the European Union – could trigger a crisis of confidence in which both lenders and lower-quality borrowers rapidly retreat from the debt markets.

In the report, they write: “Nearly half of corporate debt issuers are estimated to be highly leveraged, strongly suggesting that a correction in global credit markets is unavoidable. In fact, analysts believe that the credit correction began in late 2015 and will likely stretch through the next few years as defaults spike.

The report is critical of the world’s major central banks, which are accused of being “in thrall to the idea that credit-fuelled growth is healthy for the global economy.” Tesher, Watters and Chan say that their research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy. “This cannot continue indefinitely,” they warn.

As an increasing proportion of companies become highly leveraged, it is raising questions over their long-term debt sustainability, despite low interest rates supporting their ability to meet interest payments. The authors single out China’s opaque and ballooning corporate debt and the rapid rise of US leveraged finance, which have developed as key credit risks.


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