Sep 24, 2020
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Corporate Debt Keeps Piling Up

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Concerns About Too Much Debt Remain GETTY Over $100 billion of investment grade corporate debt has been issued already in 2019 in keeping with Bloomberg. The High Yield Market which went with no single new issue the complete month of December has down over $12 billion already this month since the spigots were re-opened on January 10th


Many will let you know that you must be alarmed by the quantity and kind of corporate debt that is outstanding! I’m not concerned. I’ve got tried to explain why There Isn t a Debt Bubble and the 2019 is the Year of the Debt Diet. Quite frankly no one seems to care


Pundits are circulating alarmist reports about corporate debt and the phobia mongering has reached a feverish pitch from time to time like GE previous to Thanksgiving. I advocate being cautious about companies with excessive and unmanageable amounts of debt but that is in my opinion a relatively small number of borrowers


Being too frightened of debt will bring about making bad investment decisions. But what in regards to the $100 billion of debt issued? Shouldn t investors be frightened of that much debt? Again the reply is no. While over $100 billion has been issued I calculate that $85 billion of debt will mature this month


The concept of net debt is important. As companies have bonds maturing it really is natural that many will repay that maturing debt with new debt. So bond managers pay close attention to net issuance. The largest bond deal of the year thus far was BUD (ABIBB is the bond ticker)


They issued over $16 billion of debt but conform to tender for the same quantity of existing bonds – again roughly ZERO net debt. The actions BUD took fit perfectly with my Debt Diet as was captured well by Barrons. If we take a long term view of debt issuance – we see that it really is slowing dramatically


2018 saw a 12% decline in total debt issued but even that lackluster pace has slowed. Since October 4th a period of virtually 4 months only $268 billion of debt has been issued. That is a 32% decline from an analogous period the year before. If that pace continues it would mean under $1 trillion gets issued for the first time since 2011 (almost $700 billion of debt is maturing this year so lets see very low new net supply – which might be healthy)


PROMOTED While the start of the year has been fast it should have been faster and there are signs that debt issuance will slow With recent market weakness fears in regards to the stability of the corporate bond market and ongoing jitters about rates of interest I’d have expected a much bigger flood of recent issues to hit the market


Financials who consistently issue debt after they report earnings surprised many market experts by issuing less and issuing shorter maturity bonds than expected. The issuers which have come to market did correlate all right with companies which have a lot of debt maturing in 2019 – fitting a view that those with debt to refinance would desire to do it ahead of later


There are other signs of the Debt Diet however the proof will be inside the pudding. If February shows signs of more issuance than I expect and a cavalier attitude towards debt then I am going to change my view but for now I feel people missed a possible returns in bonds and stocks because they were overly all for credit risk


Caution is healthy. Falling prey to dramatic headlines is bad

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