mortgage - from Old French, literally ‘dead pledge’, from mort (from Latin mortuus ‘dead’) + gage ‘pledge’.
The great deleveraging that was supposed to sweep over corporate America is dead. Normally, we’d expect corporations to reduce leverage at the tail end of growth cycles, to be better prepared for the inevitable downturn. Instead, we are seeing a continuous rise in corporate debt loads, despite some signs pointing to a recession ahead. Corporate debt ratios have been steadily rising; some by choice, as many have borrowed to finance acquisitions or share repurchases; and some as a consequences of slower revenue growth lowering the denominator in said ratios. All told, the total value of U.S. investment-grade corporate bonds now stands at around $5.8 trillion, a record high and more than triple the level in October 2008.
This isn’t to say that all debt is bad. Like a creditworthy borrower taking out a reasonable mortgage to finance the purchase of an affordable house, corporate debt can be beneficial in the long-term if done for the right reasons and on the right terms. But with so much cheap money available, we have seen more and more corporations borrow money to fuel bad decisions, and it’s getting them into trouble – this week, for example, General Electric froze its pension plan in an effort to conserve cash and service its $54 billion net debt load.
Like so many mortgagors found out in 2007, irresponsible borrowing can come with major consequences. As the chances of a recession seem to rise by the day, we would encourage corporate bond investors to question the quality of the debt they are holding and investigate the decisions the corporation made with the cash. After all, dead companies don’t pay their creditors.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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