Why GE’s credit problem is a warning to all indebted investors

Receive the DealBook newsletter to make sense of the headlines in business and politics – and the power brokers who shape them.

General Electric may be the canary in the credit market coal mine.

The company’s bonds fell sharply this week even as an asset sale briefly pushed its shares up. It is a wake-up call for all debt investors. American businesses owe more money than ever, and the quality of their loans and bonds has deteriorated. Rising interest rates and slowing growth could make this a big problem.

The struggling $ 75 billion conglomerate is an extreme case, but it illustrates much of what has transpired in American businesses and around the world over the past decade. Historically low interest rates fueled a massive borrowing boom, allowing healthy companies to expand operations or buy back stocks, and zombies to continue to stagger.

The debt of non-financial corporations in the United States is at an all-time high of over 73% of gross domestic product, according to the Bank for International Settlements. It never exceeded 65% before the 2008 financial crisis. The ratio of French corporate debt to GDP has increased by nearly a third over the past decade, and that of China by more than two thirds. .

This increasing quantity has been accompanied by a marked drop in quality. GE, which recently lost its coveted A credit rating, is illustrative again. Many other American companies have been decommissioned. As a result, triple B-rated debt – the lowest category in the investment grade – more than doubled from pre-crisis days to a record $ 2.7 trillion at the end of 2017. , according to S&P Global Ratings.

At the same time, the US junk bond market has swelled to over $ 1.2 trillion and leveraged loans now total $ 1.3 trillion, much of it in so-called products. covenant-lite with little investor protection. This prompted Senator Elizabeth Warren on Thursday to warn that leveraged loans “have many features” of the subprime mortgage boom that sparked the 2008 financial crisis.

So far, many investors have ignored these risks, comforted by the surge in corporate earnings – which rose nearly 29% for the S&P 500 Index in the third quarter of 2018. But earnings growth is expected to drop to a figure next year, according to estimates by data and information company Refinitiv. Meanwhile, the expected interest rate hike by the Federal Reserve next month will push up the cost of borrowing.

The numbers do not yet correspond to a crisis, but the trend is in that direction.

Carol M. Barragan