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Coronavirus Fears Freeze Debt Sales Two Days in a Row

Chris Gaetano
Published Date:
Feb 25, 2020

For the second day in a row, major corporate debt issuers saw no deals, as potential buyers, concerned about the impact of the coronavirus, are assessing their options, according to Bloomberg. With markets having taken a beating yesterday and today, and with tomorrow projected to be not much better, this could mean that the freeze lasts into the end of the week, at least.

Europe is experiencing a similar problem, with its debt market having slowed to a trickle over the past few weeks, according to another Bloomberg article. This is an especially sharp contrast to the beginning of the year, which saw 238.8 billion euros worth of corporate bond sales. From there, sales dropped to 53 billion euros on Feb. 7 to 51 billion euros on Feb. 14, to 27.8 billion euros on Feb. 21, and, now, 690 million euros of sales as of this week. 

Meanwhile, the same virus fears that caused bond buyers to plummet have also caused soaring numbers of people looking to sell bonds, especially risky junk bonds, according to the Financial Times. This has had an especially pronounced effect on the energy sector, with yields rising to 8.35 percentage points above benchmark U.S. Treasuries, the highest level since 2016. This, in turn, has worked to push up borrowing costs for these companies at a time when borrowing has, due to low interest rates, been historically low.

This low-interest rate environment, maintained by central banks across the world, has made credit ultra cheap for the better part of this decade, which has caused corporate debt to balloon up to $13.5 trillion. A recent report from the OECD, however, warned that much of this debt is low quality, and that this has dragged overall quality of corporate debt to lower than it was right before the financial crisis. Just over half of all corporate debt is rated BBB, the lowest possible investment grade rating. 

The proliferation of cheap debt for so many years has caused the number of "zombie companies"—that is, firms  that cannot cover their debt service costs with current earnings—to soar from 2 percent in the 1980s to 12 percent of all public companies on earth last year. The Swiss Bank of International Settlements, which produced the study concluding these findings, said that because credit is so cheap, banks find it easier to keep failing companies on life support and hope that they will recover than it is to watch them collapse, which would then force them to write off the loan. 

The IMF warned last year that while corporate debt levels have reached an all-time high, actual performance of these companies has been mediocre overall. While the aforementioned easy-credit environment has allowed companies to maintain business as usual, even in these conditions, the report says that, "in a material economic slowdown scenario, half as severe as the global financial crisis," the amount of debt-at-risk (defined as debt owed by companies whose earnings are insufficient to cover interest payments) would amount to $19 trillion, or roughly 40 percent of all global corporate debt. When aggregated down to individual countries, the IMF said that certain areas have at-risk debt levels equal to, or even beyond, those prior to the financial crisis. 

Even before virus fears dominated the headlines, credit was actually getting more difficult to access for some of the riskiest corporations. The Wall Street Journal reported last year that many firms with lower credit ratings, generally in the subprime territory, are experiencing financial distress caused partially by changing business conditions (such as a landline phone company facing competition from mobile devices) but also by a wave of credit downgrades. It noted, for instance, that the number of loans downgraded by S&P Global Ratings has outpaced upgrades over the past three months by the largest amount in a decade. This has had the effect of increasing borrowing costs on firms that, by and large, have come to rely on cheap credit. 

Fears of the virus have already disrupted the global economy, with Fortune reporting that 94 percent of the Fortune 1000 firms are seeing supply chain disruptions due to the epidemic. Economists at Oxford Economics estimate that total damage from the virus could reach $1 trillion or more. Stocks, meanwhile, have tumbled for the third day in a row: As of 2:00 p.m. Tuesday, the Dow had lost more than 600 points, according to CNN, and yesterday it suffered the worst loss in years, when it dropped more than 1,000 points. 

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