OECD warns against buildup of low-quality corporate debt

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Angel Gurria, OECD Secretary General Jose, addresses the media at the organization’s headquarters in Paris, France, Nov. 21, 2018.

Eric Piermont | AFP | Getty Images

The volume of corporate debt reached a record high of $ 13.5 trillion at the end of 2019, but overall bond quality has fallen below levels seen before the global financial crisis, according to a new OECD report.

Corporate bond issuance has been largely driven by structural reforms and a more expansionary monetary policy globally, becoming a viable source of long-term financing for non-financial corporations since the crisis. As a result, non-financial corporations around the world borrowed an estimated $ 2.1 trillion in corporate bonds in 2019.

However, the report by 36 members of the Organization for Economic Co-operation and Development (OECD) pointed out that compared to previous credit cycles, treasury of outstanding corporate bonds is of lower overall credit quality, with higher repayment requirements, longer maturities and lower investor protection.

This can make the non-financial business sector and the economy in general more vulnerable to the negative effects of an economic downturn.

The OECD was established in 1961 as an intergovernmental organization aimed at boosting global economic progress and trade, made up primarily of the world’s most advanced countries, which account for around 80% of global trade and investment.

OECD Secretary General Angel Gurria has said that high levels of indebtedness in the corporate sector “make it essential to put in place reforms that make all parts of the capital markets fit for purpose.”

“This must include measures to improve the ability of stock markets to strengthen corporate balance sheets and support long-term investments,” he added.

Just over half (51%) of all new investment grade bonds were rated BBB, the lowest investment grade rating available.

In the period from 2000 to 2007, before the global financial crisis, only 39% of investment grade corporate bond issues were rated BBB.

According to the OECD report, issuance of non-investment grade bonds also increased, accounting for 25% of all issuance of non-financial corporate bonds in 2019. This figure has remained at 20% or more since 2010, the longest period since 1980 when the share of non-investment grade issues has remained so high.

The OECD has suggested that as a result, default rates in a future downturn are likely to be higher than in previous credit cycles.

In 2019, only 30% of global non-financial corporate bonds outstanding were rated A or higher and issued by companies in advanced economies, the report pointed out, and the growing stock also correlates with the increase in bonds. reimbursement.

At the end of 2019, non-financial companies around the world had to repay or refinance an unprecedented $ 4.4 trillion in corporate bond debt in three years, according to the report, which is a record 32.4% of the total outstanding of corporate bonds compared to only 25.% 10 years ago.

The OECD has pointed out that the low interest rate environment and the mechanics of credit ratings have enabled companies to increase their debt ratios and maintain their credit ratings.

However, the report warned that without the security of low interest rates, or if business slows down, these rating mechanisms will lead to downgrades that will increase borrowing costs and limit the investment margin.

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