Corporate America’s debt load is nearing $10 trillion, a record 47% of the overall economy — and experts around the world are sounding the alarm

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Justin Sullivan/Getty Images
  • US corporate debt has swelled to nearly $10 trillion, according to data recently cited by the Washington Post.
  • That comes out to roughly 47% of the overall economy, which is a record, WaPo found.
  • Experts from the International Monetary Fund to trillion-dollar asset manager BlackRock are warning of the risk posed by ballooning investment-grade debt.
  • Following the 2008 financial crisis, companies have issued record-levels of bonds to investors amid historically low interest rates.
  • Visit the Business Insider homepage for more stories.

US corporations are sitting on nearly $10 trillion in debt. That’s equivalent to roughly 47% of the overall economy, which is a record, according to date first cited by the Washington Post.

Since the financial crisis in 2008, corporations have splurged on debt amid historically cheap borrowing costs. In recent months, experts have warning that ballooning corporate debt could worsen a future economic downturn.

Here’s what experts from the International Monetary Fund to trillion-dollar asset manager BlackRock are saying about rising corporate debt.

Read more: For 30 years, Renaissance Technologies achieved 66% annualized returns. Here’s how a group of academics with no trading experience became the most successful hedge fund in history.


International Monetary Fund

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Reuters

As central banks around the world have loosened monetary policy over the last decade, corporations have felt encouraged to pursue “financial risk-taking,” according to a report from the IMF published in October.

That dynamic has made some systemically-important economies more vulnerable to an economic slowdown, the report found.

“Corporate leverage can also amplify shocks, as corporate deleveraging could lead to depressed investment and higher unemployment, and corporate defaults could trigger losses and curb lending by banks,” the IMF wrote.

In a recession half as severe as the 2008 financial crisis corporate debt-at-risk – which is owned by firms that can’t cover interest expenses with their profits – could increased to $19 trillion, or almost 40% of total corporate debt in major economies, the IMF said.


BlackRock

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Thomson Reuters

The trillion-dollar asset manager said in a report in October that BBB-rated bonds, the lowest bracket of the investment-grade debt, now accounts for more than 50% of the market compared to 17% in 2001.

As demand for investment-grade debt has grown, the creditworthiness of issuers has fallen. According to BlackRock, leverage levels are creeping toward the highest readings since 1992. The firm measured leverage using a ratio of debt minus cash and cash equivalents to twelve-month EBITDA.

“We believe the sharp increase in the proportion of BBB-rated constituents has made the investment-grade bond sector riskier than in recent years,” BlackRock wrote. “BBB-rated bonds are typically the most vulnerable of all investment-grade debt in a recession.”

If BBB-rated bonds are downgraded, they would then be considered high-yield debt, or “fallen angels.” That could cause the value of the issues to fall, the firm added.


Federal Reserve

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Reuters

The central bank warned in its November Financial Stability Report that the riskiest companies have accounted for the bulk of rising debt in recent years.

The Fed also expressed concern about outstanding BBB-rated debt approaching an all-time high.

“In an economic downturn, widespread downgrades of bonds to speculative-grade ratings could lead investors to sell the downgraded bonds rapidly, increasing market illiquidity and downward price pressures in a segment of the corporate bond market known already to exhibit relatively low liquidity,” the central bank wrote.

The ratio of debt-to-assets for all publicly-traded nonfinancial companies has hit its highest level in two decades, and the leverage ratio among debt-heavy firms is near a historical high, the Fed added.