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Corporate Debt - A Deeper Dive on a Potential Bubble

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(Peter Davaney-Graham) #1

I was very interested in @Konstantin.Fominykh post on is 1TR Corporate Bonds rolling over next year a problem? as the FactSet Debt Capital Structure DataFeed seems uniquely positioned to provide insight on the topic.

I decided to focus on the S&P 500 (ex. Financial Sector) and look at some of the same themes.

Many of the arguments being presented revolve around the idea that companies have issued a lot of very cheap debt that has been used to fund stock buybacks. With the Fed raising interest rates and less accommodative fiscal policy, there is the potential for a nasty unwinding of the corporate debt market. The impact, the argument goes, will affect both the stock and bond market as companies will no longer have access to easy credit to support ongoing buybacks, removing that support from the market.

Looking at companies in the S&P 500 there has been a trillion dollar increase in debt outstanding from around 3.5 trillion in early 2015 to over 4.6 trillion as of 3/31/2019.

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Most of that debt has been issued with fixed coupons, and as expected, these large cap companies are taking advantage of low interest rates. The breakdown of (fixed coupon) debt by coupon rate shows a dramatic increase in rates in the 2—4% range with higher costing debt dropping off dramatically.

This confirms the narrative that debt levels are rising and have been financed with cheap, low-cost debt. Great today, but a burden to roll-over tomorrow. Looking at the maturity schedule for the S&P 500 – the picture is a little clearer. Only about 16% of the total debt outstanding is due in the next two years.

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One area of definite concern is that much of the majority of the debt due in the next two years has a coupon of less than 4%, so companies may find themselves needing to roll-over or retire this debt in higher interest rate environment.

I’ve reached the same conclusions as Konstantin, while worth watching, there doesn’t appear to be an immediate cause for concern in the corporate debt space.

The FactSet DCS DataFeed includes instrument level detail for a company’s liabilities. This data is reconciled to both the Issuer balance sheet and the individual instrument data giving a user the ability to fully understand a company’s DCS. To learn more, check out the FactSet’s Debt Capital Structure DataFeed page on the Open:FactSet Marketplace.

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