In its latest Global Stability Financial Report, the IMF issued a stark warning, bringing attention to the troubling and seemingly unstoppable growth in global corporate debt and the threat that could be unleashed by a sharp move higher in rates, one which the IMF estimates could result in as many as 22% of total corporations – amounting to almost $4 trillion in assets – being unable to cover their interest payments, leading to an avalanche of defaults. Furthermore, as the IMF highlighted, leverage had reached, and surpassed, historical levels which in the past translated into economic recessions.
The report prompted some to challenge the IMF report’s assumptions, and to point out that leverage was in fact far more modest than during previous cycles.
To resolve this particular debate, Morgan Stanley has conveniently issued a report which looks at corporate debt from several different angles, and which reaches a uniform conclusion: debt, whether total or net, relative to either EBITDA, Cash From Operations or Free Cash Flow, is at or near all time highs highest it’s been.
Here are the summary findings:
- Most ways we slice the data, corporate leverage is elevated, in many cases at or near prior cycle peaks – IG gross leverage trends using medians, simple averages, weighted averages, a constant universe of companies, and aggregating total debt and EBITDA all tell a similar story. In high yield, leverage is also elevated along most of these measures.
- Net leverage is less extreme than gross, but still near prior cycle peaks on most measures. IG net leverage using a weighted average looks the most benign relative to history, though we note that the weighted average is heavily skewed by a small number of very large names with negative net debt.
Visually, first we look at total non-financial leverage in the form of corporate debt and corporate bonds as a % of GDP. Both are at or near all time highs.
Next, MS looks at how total IG leverage is changing for a consistent universe of companies over time (constant universe) both using median leverage, and dividing total debt for the full universe by total EBITDA each quarter (aggregated);
- When using the aggregated data, both gross and net leverage are at or near record leverage levels, well above prior cycle peaks.
MS then notes that some argue that leverage looks healthier focusing on cashflow vs EBITDA. It finds total debt/LTM cash from operations (CFO) actually looks worse.
More IG charts looking at total debt…
And net debt.
Digging into the data, some further component details:
Finally, away from IG, here is HY. Same picture, first on a total debt basis…
And here is net debt.