Investor Essentials Daily

The corporate push to evade recession

April 8, 2024

Corporate borrowing has skyrocketed, reaching $606 billion in debt issuance in the first quarter, a 40% increase from the same period in 2023.

Initially driven by private equity-backed firms, this trend has expanded across both investment-grade and high-yield public companies.

Despite the highest interest rates in 20 years, companies continue to refinance, significantly reducing the looming debt maturities for 2024 and 2025.

This activity could stabilize the market, reducing the immediate risk of a downturn due to mass bankruptcies and potentially supporting continued market growth.

However, the sustainability of these companies in managing higher interest payments remains a critical factor to watch.

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The corporate borrowing has seen an unprecedented surge, with companies leveraging financial markets as though anticipating no future repercussions.

Initially, this trend appeared confined to private equity-backed firms, aiming to distribute substantial dividends before potential market downturns.

However, the borrowing spree has since expanded, enveloping both investment-grade and high-yield public corporations.

An astonishing $606 billion was raised through debt issuance in the first quarter alone, marking a 40% increase from the same period in 2023 and reaching heights unseen since 1990.

This surge stems from various factors, including geopolitical uncertainties tied to the forthcoming election or a consensus that current interest rates are as favorable as they will get. Such developments significantly alter the debt landscape’s future outlook.

Contrary to popular belief, high-interest rates alone don’t precipitate recessions—debt maturities do. Companies facing substantial upcoming debt obligations without the means for refinancing or repayment are left with bankruptcy as their only option.

The gravity of such situations often becomes apparent months in advance, signaled by deteriorating cash flows, profitability, and overall financial health.

Since the Federal Reserve began raising interest rates in March of 2022, yields on new debt have skyrocketed.

Companies that could borrow at 2% or less are now lucky to lock in 5.5% interest rates. And riskier companies that have to borrow at high-yield rates are typically borrowing for 10% or more.

We expected sky-high rates to scare companies away from refinancing…

But that doesn’t seem to be the case. As we mentioned, even as interest rates have stayed at their highest levels in 20 years, companies are starting to borrow more.

And these borrowings are actually starting to push back corporate debt headwalls that were piling up over the next two years.

That $606 billion in debt issuances has significantly cut down junk bond and leverage loan debt maturities in 2024 and 2025, as this research from BofA shows.

Take a look at how much lower the 2024 and 2025 debt maturities are…

As you can see, companies have cut 2024 debt maturities down by at least 75%, and they’ve cut 2025 debt headwalls in half.

This makes the corporate debt landscape far less intimidating… which could significantly change how the market does this year.

Without a serious debt headwall, the market could easily keep climbing.

We’ll have to keep a close eye on the debt that remains over the next two years… and we’ll have to see if companies can handle their higher interest payments.

There’s still a decent chance some companies won’t be able to refinance, and they’ll end up going bankrupt. But this mass refinancing could keep the market afloat longer than we expected.

Without a wave of bankruptcies, the market doesn’t have much of a reason to fall, which means good news across areas like artificial intelligence and infrastructure spending could keep the market rally going.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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