The Strategist

OECD warns of growing bond debts

02/27/2019 - 03:47

At the end of 2018, the world bond debt of companies peaked at $ 13 trillion. Given deterioration in the quality of issuers in the event of a crisis, it threatens with a large number of defaults, the OECD warns. However, the peak of placement has already been passed back in 2017. In 2018, after raising the US Federal Reserve rate and increasing the required yield on bonds, taking into account the repayment of part of the debt, issuers occupied 40% less in the markets than a year earlier.

At the end of 2018, the volume of global corporate debt formed as a result of bond issuance by non-financial corporations reached a record level of $ 13 trillion. This follows from a new report of the Organization for Economic Cooperation and Development (OECD). They note that now this figure is twice the amount of debt in circulation before the 2008 financial crisis.

79% of the $ 13 trillion ($ 10.2 trillion) are located in developed countries, and their load has increased over the decade by 70%. In developing countries, the growth of the load amounted to 395% as the debt rose to $ 2.8 trillion. In total, the OECD report takes into account data on 85 thousand bond issues in 114 countries. The share of bonds in the total volume of borrowing over the decade increased from 48% to 57%, the report says. At the same time in the next three years, issuers will have to cover or refinance liabilities of $ 2.9 trillion in developed countries and $ 1.3 trillion - in developing ones.

On average, debt securities have been issued for $ 1.7 trillion ($ 864 billion before 2008) every year since the crisis. At the same time, the peak in developed countries was passed in 2017 ($ 1.5 trillion versus $ 1.2 trillion last year). In developing countries, the largest volume was noted in 2016 ($ 711 billion), and it has decreased by about 30% in the past two years (although this is still significantly higher than before the crisis - about $ 70 billion annually).

It should be noted that taking into account the securities redeemed in the same year (the volume of net offerings), the overall decline is even more obvious. In 2018, issuers “outright” borrowed $ 413 billion against $ 699 billion in 2017. The volume of placement of non-investment bonds turned out to be negative, which was a result of a reduction in investor interest (over the past 20 years, this happened only in 2008). The US remains the largest placement market (at the peak in 2017 - $ 872 billion, in 2018 minus 30% of this level). In China, over ten years, the volume of placements has grown from almost zero to $ 590 billion (at the peak in 2016).

The quality of securities is reduced in both investment and "junk" categories, the OECD noted. The share of bonds with a low investment rating (BBB) is now a record 54% ($ 3.6 trillion) versus 30% in 2008, while the shares of securities with AA and AAA ratings are falling. This increases likelihood of a large number of defaults in the event of a crisis, the report says. All in all, if an external shock occurs in a non-investment category, there may be $ 500 billion worth of paper. The issuers will face a sharp increase in debt service costs — the demand for such assets will not be able to compensate for the increase in supply.

In 2017, only 2.8% of issuers lost their investment status, but this share could increase (in 2009, those were 7.5%). The level of protection of holders of securities with a non-investment rating using covenants (conditions under which the issuer must repurchase the paper) has noticeably decreased. The average loan term increased over the decade from 9.1 to 12.3 year for issuers with an investment rating in developed countries. In developing countries, it decreased from 7.8 to 7.6 years in the first case and from 5.8 to 3.8 years - in the second.