Stuff from the news… Debt!

I was reading the FT and read thought I’d try and get my head around this record $8 trillion corporate borrowing surge. The figure, seemed mental and incredibly high but it highlights trends in liquidity demands, funding strategies, and risk profiles, directly impacting cash flow forecasting, debt management, and investment opportunities crucial to strategic treasury decisions.

So I thought I’d trawl through the news and (1) see what I could find and (2) try and and understand why this is happening.

Part 1 — What could I find…

• “Global corporate borrowing climbs to record $8tn in 2024” — Financial Times (link here)

This article reports that global corporate debt sales soared to a record $8 trillion in 2024, a more than one-third increase from 2023. Companies such as AbbVie, Home Depot, and Boeing capitalised on favourable borrowing costs and strong investor demand to secure funding. The Federal Reserve’s interest rate cuts contributed to this trend, with some companies accelerating their borrowing plans to mitigate future risks. Despite narrow spreads, borrowing costs remained elevated due to high Treasury yields. Investors poured almost $170 billion into global corporate bond funds, marking a record inflow. Experts anticipate continued borrowing activity in 2025, driven by refinancing needs and potential large-scale debt-financed mergers and acquisitions.

• “Investors are starting to see companies as a safer bet than countries” — The Times (link here)

This piece discusses the recent trend in bond markets where corporate credit spreads in the US, UK, and parts of Europe have been tightening relative to government bonds. This indicates that debt issued by companies may soon be perceived as less risky than sovereign debt. The shift is attributed to the COVID-19 pandemic, during which governments borrowed heavily to support economies, strengthening corporate balance sheets. Additionally, the growth of private debt markets has provided companies with new borrowing options, further reducing the perceived risk of corporate debt. In contrast, governments face ballooning deficits and rising interest payments, burdening them with tighter financial constraints. This evolving scenario suggests a fundamental shift in investment principles and financial markets.

• “Red-Hot Bond Market Powers Wave of Risky Borrowing” — The Wall Street Journal (link here)

This article highlights how, in recent months, weaker businesses have expedited borrowing from the thriving credit market, refinancing older debt and funding dividends. September saw companies like US Foods and Royal Caribbean Cruises issue $109.7 billion in junk-rated bonds and loans, marking the third-highest monthly total since 2005. The yield gap between speculative-grade bonds and U.S. Treasurys fell to 2.85 percentage points, reflecting investor confidence in the economy’s stability. This borrowing spree has significantly reduced debt maturing in 2025, pushing the maturity wall to 2028 and beyond. Despite rising interest rates, experts see the recent changes as manageable, enabling businesses to attract funding with favorable terms.

• “This opaque, lightly regulated corner of Wall Street is growing by leaps and bounds. Some worry it will eventually deliver a shock to the financial system.” — MarketWatch (link here)

This article examines the rapid expansion of the private credit market, a $1.5 trillion sector characterized by opaque and minimally regulated business loans. Private credit has become integral to the financial strategies of numerous Americans, attracting substantial investments from insurance annuities and pension funds due to its higher returns. High-profile financial names such as BlackRock, State Street, JPMorgan Chase, and Apollo Global Management are increasingly involved in private credit deals. Despite warnings from Federal Reserve officials and the International Monetary Fund regarding its unchecked growth, private credit continues to present opportunities for substantial returns, posing both promising and precarious elements in the financial landscape.

• “How private equity tangled banks in a web of debt” — Financial Times (link here)

This piece explores how private equity firms have become an integral part of the global economy, with assets controlled by groups such as Blackstone, Apollo Global Management, and Carlyle Group quadrupling since 2012 to about $8 trillion. As the size of the private equity industry has grown, so too has the debt it uses to buy companies, enabled by a decade of ultra-low interest rates. The article delves into the complex layers of leverage and the intricate relationships between private equity and banks, raising concerns about potential risks to the wider financial system.

Part 2 — Why this is happening

Turns out, that the Financial Times is quite thorough in its reporting and did a good job of explaining why. Now… I promise I did head elsewhere and have a look at other publications!

1. Favourable Borrowing Costs: Recent interest rate cuts by central banks, such as the Federal Reserve, have lowered borrowing costs, making debt financing more attractive for companies. This environment encourages firms to issue bonds and secure loans at lower interest rates. (link here)

2. Investor Demand: There’s a strong appetite among investors for corporate bonds, driven by the search for higher yields in a low-interest-rate environment. This demand enables companies to issue debt with favourable terms. (link here)

3. Strategic Financial Management: Companies use debt to finance mergers and acquisitions, expand operations, and invest in growth opportunities. Debt financing can be preferable to issuing equity, as it allows existing shareholders to retain control and can be a cheaper source of capital. (link here)

4. Refinancing Existing Debt: With the current low-interest rates, companies are refinancing older, higher-interest debt to reduce interest expenses and extend debt maturities, improving their financial stability. (link here)

5. Market Conditions and Economic Outlook: Positive economic indicators and strong stock market performance boost investor confidence, making it easier for companies to raise debt. Additionally, companies may accelerate borrowing to preempt potential market volatility or economic downturns. (link here)