The quantity of corporate debt hit record levels at the end of 2019, and the quality of that debt has declined, says the Organization for Economic Cooperation and Development (OECD).
The OECD reported that the value of corporate debt topped US$13.5 trillion at the end of last year, which represented an all-time high in real terms.
The increase in the size of company debt was driven by “the return of more expansionary monetary policies,” the OECD said.
Additionally, the organization reported that the overall quality of corporate debt declined. For instance, over half (51%) of new investment-grade bonds issued in 2019 were rated BBB — the lowest investment-grade rating, the OECD said.
It further reported that non-investment-grade issuance increased.
“Since 2010, at least 20% of all bond issues have been non-investment grade, and, in 2019, they accounted for 25% of all non-financial corporate bond issues,” it said.
The increase in corporate debt is also associated with an increase in repayment obligations.
The OECD reported that, as of the end of 2019, non-financial companies must repay or refinance an “unprecedented” US$4.4-trillion worth of corporate debt within the next three years.
“This represents a record 32.4% of the total outstanding amount of corporate bonds, up from about 25% 10 years ago,” it said.
Moreover, given the low interest rate environment, companies have been able to increase their leverage and maintain their credit ratings.
“Today, the median firm in each investment-grade rating is more leveraged than a decade ago,” the organization said.
“In comparison to previous credit cycles, today’s stock of outstanding corporate bonds has lower overall credit quality, higher payback requirements, longer maturities and inferior investor protection,” it said.
The weaker quality of outstanding corporate debt may “amplify the negative effects” of an economic downturn on the economy, it noted.
“The high levels of leverage in the corporate sector now make it essential to put in place reforms that make all parts of capital markets fit for purpose. This must include steps to improve the ability of equity markets to strengthen corporate balance sheets and support long-term investments,” said OECD secretary-general, Angel Gurría.