Debt levels of global companies have surpassed those in 2007, as finance chiefs take advantage of low interest rates and strong investor demand, according to a report by Moody’s.
About 4,000 non-financial companies rated by Moody’s indicate their leverage is around 20% higher now than in 2007 while the total share of firms with an investment grade Aaa-to A-rating has from 21% before the financial crisis in 2007 to 15% now.
However Baa-ratings—the lower end of the investment grade spectrum—have risen from 55% in 2007 to the current 63%.
In addition, about 60% of companies are considered speculative grade—with more than 40% rated B1 or lower, according to Moody’s. Their median ratio of debt to earnings before interest, tax, depreciation and amortization is about 10% higher than in 2007, while that ratio is around 30% higher at investment grade companies than in 2007.
The rating agency’s group credit officer Mariarosa Verde was quoted in a Wall Street Journal report as saying that firms have increased their leverage and many of them pursue mergers and acquisitions.
She added that loose monetary policy and investors’ search for yield have provided companies with good financing conditions and increasingly weak debt covenants.
“Finance chiefs make use of current conditions to borrow more rather than reducing debt levels,” she was cited as saying in the report.
As more firms—even those with weak underlying financials—have been able to access the capital markets, there is a risk to investors during the next financial downturn when earnings shrink and debt comes due, she noted .
As countries tighten their monetary policies, there could be more defaults in the future, Verde was cited as saying. However credit conditions remains benign in the near term Verde was cited as saying, adding that The default rate for speculative grade companies was 3% at end-April compared with 3.2% in March and is predicted to fall to 1.7% at year end.