Risks in financial markets that were ignored during long expansion are being exposed
The mammoth debt bulge includes a significant increase in borrowing by firms with the lowest-quality investment grade — those rated just one level above “junk.” More than $1 trillion in “leveraged loans,” a type of risky bank lending to debt-laden companies, is a second potential flash point.
Watchdogs including the Federal Reserve have warned for years that excessive borrowing by corporations, including some with subpar credit ratings, might eventually blow a hole in the U.S. economy. Now, as Wall Street wrestles with a global epidemic, the debt alarms show how investors are reassessing risks they overlooked during the long economic expansion.
“It is a big concern,” said Ruchir Sharma, chief global strategist for Morgan Stanley. “We’re dealing with the unknown. But given the enormous increase in leverage, the system is fragile and vulnerable.”
Energy companies that have borrowed heavily in recent years may be the first to suffer, as a result of the oil price war between Saudi Arabia and Russia. Falling oil prices, while good news for consumers, may reach levels that will make it impossible for companies in the U.S. shale industry to cover their costs.
On Monday, investors battered some energy companies that have big outstanding obligations. Shares of Halliburton, which has more than doubled its total debt to $11.5 billion since 2012 despite sliding revenue and earnings, lost 38 percent of their value.
The oil field services company last week raised $1 billion by selling investors 10-year bonds paying interest of 2.9 percent. Halliburton said it plans to use the proceeds to pay off existing debt. Over the next six years, it faces $3.8 billion in debt payments.
Today’s debt woes originated in the months that followed the September 2008 Lehman Brothers collapse.
In response, the Federal Reserve cut its benchmark lending rate to zero and kept it at or near historic lows for a decade. The aim was to heal a wounded economy, but the era of easy money bred excesses that only now are coming into view.
Access to low-cost credit helped many companies grow and hire. But it also enabled some that weren’t profitable to survive by repeatedly refinancing their debt. These “zombie” firms, which do not earn enough to cover their interest payments, account for 1 in 6 publicly traded U.S. companies, Sharma said.
About half of the total debt of nonfinancial companies is rated “BBB,” just slightly better than junk or high-yield debt. Companies such as eBay and Martin Marietta have sold bonds this month to investors with such ratings.
Using a broad measure of business liabilities, the ratio of debt to assets is at its highest in 20 years, according to the Federal Reserve. One potential trouble spot lies in the rapid growth of “leveraged loans,” made by top banks such as Goldman Sachs and JPMorgan to scores of cash-short companies.
Until recently, such loans typically were made to companies that were not already deeply in debt. But in the past two years, the biggest borrowers were the nation’s most indebted companies, according to the Federal Reserve. In the first half of last year, about 40 percent of leveraged loans went to companies with a debt-to-earnings ratio of 6-to-1 or greater.
Businesses have been able to bear their extraordinary debt burden only because borrowing costs have been historically low. If that changes for any reason, cash-strapped companies probably would resort to layoffs and slash their spending on new factories and equipment to conserve money for interest payments.
The danger now is that the economy’s sudden stop — with conferences and other public events canceled, travel discouraged and consumers staying home — will cut revenue for many companies and make it harder for them to repay their creditors.
Even before the full effects of the coronavirus hit the United States, analysts were cutting their earnings forecasts. As of Feb. 28, more than twice as many companies in the Standard & Poor’s 500-stock index had issued negative guidance on their first-quarter earnings as had issued upbeat assessments, according to FactSet, a financial data company.
At the same time, nervous investors are becoming pickier about which borrowers they fund, cutting off the flow of cheap money to companies that need it to stay alive.
“It’s a pandemic of fear that’s spreading faster than the virus,” said Ed Yardeni, the eponymous head of a research firm.
In recent days, signs of bond market stress have been multiplying. After years of barely distinguishing between good credit risks and bad, investors are growing more discerning.
The “spread,” or additional yield, that investors demand to hold junk bonds compared to risk-free U.S. Treasurys has increased by more than two percentage points since mid-February — about four times the increase investors required from more creditworthy borrowers, according to Bloomberg Barclays data.
Fearing the higher interest charges — and hoping for additional Fed rate cuts — some corporate borrowers have delayed issuing debt.
New corporate bond issues were falling even before the coronavirus upset Wall Street over the past few weeks. In January, U.S. corporations sold $63.4 billion worth of bonds to investors, down more than 10 percent from the same period one year earlier, according to the Federal Reserve.
“Corporate bond issuance has petered out quite a bit,” said Kathy Bostjancic, a U.S. financial market economist at Oxford Economics. “There were a few days last week we didn’t have any. … There’s just so much fear.”
Ratings agencies, including S&P Global Ratings, also are scrutinizing corporate borrowers for evidence of weakness. On Monday, S&P Global placed Ryman Hospitality Properties, which owns hotels and resorts including the Gaylord Opryland, on a negative watch, citing “significant coronavirus-related cancellations.”
If the economic outlook darkens quickly, a large number of borrowers might become “fallen angels,” downgraded from the lowest investment grade into the speculative junk market. Along with higher borrowing costs, some of them might struggle to find creditors because many pension plans, insurers and mutual funds are permitted to buy only investment-grade securities.
“We’ve had so many years of cheap and easy money with little differentiation in credit quality,” said Sonja Gibbs, managing director with the Institute of International Finance. “What happens if you start seeing downgrades?”
The current bond market turmoil is not as severe as that experienced during some previous recessions, Sharma said. Overall financial conditions are about as tight as they were during the 2011 European debt and currency crisis, although not as bad as during the global financial crisis, according to Deutsche Bank Securities.
“The likelihood that we’ll have a full-blown liquidity crisis is pretty limited,” said Michael Stritch, chief investment officer for BMO Wealth Management. “The banking sector is much less leveraged than in the past, so that’s a positive in terms of credit availability.”
Still, with investors expecting the Fed to return its key lending rate to zero in the next few months, some Fed officials are calling for the central bank to take additional extraordinary action. Eric Rosengren, president of the Federal Reserve Bank of Boston, said on March 6 that the Fed should consider buying assets other than government securities to buttress the economy.
Rosengren didn’t offer any specifics, but acknowledged that Congress would need to authorize any Fed purchase of stocks or corporate bonds.
Corporate debt excesses are not limited to the United States. Corporate zombies also roam the European Union and Japan, where borrowing costs have been low for years and are now negative. In a 2018 study of 14 advanced economies, the Bank of International Settlements said the share of zombie firms had risen from 2 percent in the 1980s to 12 percent in 2016.
The International Monetary Fund and the Fed have warned about reckless corporate borrowing for several years. In a global downturn that was half as severe as the 2009 crisis, corporations in eight major economies, including China, Japan and the United States, may be unable to repay $19 trillion worth of debt — nearly 40 percent of the global total, according to the IMF’s most recent global financial stability report.
“These debt levels truly are troublesome, any way you measure them within the U.S., China and Europe. But you need some kind of catalyst to get people to worry about it,” Gibbs said. “This kind of position we find ourselves in is the type of catalyst that can create a contagion.”
A Week After the Midterms, Trump Seems to Forget the Caravan
For weeks before the midterm elections, President Trump warned ominously about the threat from a caravan of migrants streaming from Central America toward Mexico’s border with the United States. It was a fearsome mix of criminals and “unknown Middle Easterners,” Mr. Trump claimed darkly, one that constituted a genuine national emergency.
But since the election last week, Mr. Trump has tweeted about the caravan exactly once — to issue a proclamation preventing those who cross the border illegally from applying for asylum in the United States. Fox News, which faithfully amplified Mr. Trump’s warnings about the migrants, has gone similarly quiet on the subject.
There was little dispute, even before Election Day, that Mr. Trump was exploiting the caravan for political purposes. But analysts, historians and veterans of previous administrations said there were few comparable instances of a commander in chief warning about what he called a looming threat, only to drop it as soon as people voted.
While the caravan has faded from television screens, the costs of Mr. Trump’s response to it have not. Nearly 6,000 active-duty troops remain deployed from the Gulf Coast to Southern California, where they are putting up tents and stringing concertina wire to face a ragtag band that is still not near the border.
“Now that the political utility of troops on the southern border to face a fictitious caravan invasion threat is over,” said Adm. James G. Stavridis, a former commander of the military’s Southern Command, “let’s hope the president will stand down the troops so they can be with their families — especially over the holidays.”
But some officials in the Defense Department worry that Mr. Trump could do the opposite — seek an exception to the Posse Comitatus Act, the 1878 law that prohibits the government from using active-duty troops to enforce laws inside the country’s borders.
.. voters who made up their minds in the last three days before the election said they voted for Democrats over Republicans 53 percent to 41 percent. That coincides with the period in which Mr. Trump redoubled his focus on the caravan, rejecting the advice of aides who wanted to air a commercial promoting the healthy economy.
.. At one campaign rally after another, Mr. Trump said the election came down to “the caravan, law and order, and common sense.” In Mesa, Ariz., on Oct. 19, he said: “You got some bad people in those groups. You got some tough people in those groups. And I’ll tell you what — this country doesn’t want them. O.K.? We don’t want them.”
.. A day earlier, he tweeted about the “assault on our country at our Southern Border, including the Criminal elements and DRUGS pouring in.”
Mr. Trump posted footage of an undocumented immigrant on trial for killing a police officer, and his campaign organization produced an ad featuring migrants trying to scale a wall to dramatize the stakes of the election.
“I’ve never before seen an American president, after going all over the country about this national crisis, then the day after an election shrug,” said Douglas Brinkley, a presidential historian at Rice University.
The closest parallel that Mr. Brinkley drew was to President Lyndon B. Johnson, who seized on — and mischaracterized — two murky encounters between American and North Vietnamese warships in the Gulf of Tonkin in 1964 as a pretext to accelerate America’s engagement in the Vietnam War. Still, he said, Mr. Trump’s response was of a different order.
“It was a dangerous form of xenophobia, aimed solely for electoral purposes and had nothing to do in the end with real national security,” Mr. Brinkley said.
For the troops, so far, it has mostly been an expensive field trip. The cost of the deployment is not known, but budget officials believe it could reach $200 million if all 15,000 troops that Mr. Trump pledged are ultimately sent.
.. Defenders of Mr. Trump said the troops would take little notice of his sudden lack of emphasis on the caravan.
“Knowing the troops, knowing how busy they are, they’re not focused on him,” said Jack Keane, a retired four-star general who is a former vice chief of staff of the Army. “They’ve got a job to do.”
But other former military officers said the soldiers were well aware of the political motivation behind their mission. Lacking much else to do, they will quickly pick up on Mr. Trump’s loss of interest in the caravan, and it will add to their already depleted morale.
Power doesn’t always corrupt ..
Power doesn’t always corrupt, and you can see it in the case of, for example, Al Smith or Sam Rayburn. There, power cleanses. But what power always does is reveal, because when you’re climbing, you have to conceal from people what it is you’re really willing to do, what it is you want to do. But once you get enough power, once you’re there, where you wanted to be all along, then you can see what the protagonist wanted to do all along, because now he’s doing it.
The Baptist Apocalypse
Such a God might, for instance, offer political success as a temptation rather than a reward — or use an unexpected presidency not to save Americans but to chastise them.
.. so far the Trump presidency has clearly been a kind of apocalypse — not (yet) in the “world-historical calamity” sense of the word, but in the original Greek meaning: an unveiling, an uncovering, an exposure of truths that had heretofore been hidden.
.. That exposure came first for the Republican Party’s establishment, who were revealed as something uncomfortably close to liberal caricature in their mix of weakness, cynicism and power worship. It came next for the technocrats and the data nerds of the Democratic Party, who were revealed as ineffectual, clueless and self-regarding ..
.. And then it came for a range of celebrated media men, from Harvey Weinstein to Matt Lauer ..
.. It has come as well for figures whose style anticipated him (Roger Ailes, Bill O’Reilly, that whole ménage) and for figures who have deliberately attached themselves to his populist revolt. The sins of Roy Moore were more exposed by the Trump era, and now likewise the racist paranoia of Roseanne Barr.
.. a similar moral exposure has come to precisely the sector of American Christianity where support for Donald Trump ran strongest — the denominational heart of conservative evangelicalism, the Southern Baptist Convention.
.. The main case is Paige Patterson, the now-erstwhile president of a major Baptist seminary in Fort Worth, who was eased into retirement over revelations that he’d counseled abused women to return to their husbands and allegedly shamed and silenced at least one rape victim.
.. Patterson is a beginning, not an end.
.. Late last year I wrote an essay speculating about the possibility of an “evangelical crisis” in this era, driven by the gap between the older and strongly pro-Trump constituency in evangelical churches and those evangelicals, often younger, who either voted for the president reluctantly or rejected his brand of politics outright.
.. “the big story behind the story of Patterson’s fall is a high-stakes showdown between two generations of Southern Baptist leaders.” Both generations are theologically conservative, but the figures raising their voices against Patterson have been — generally — associated with a vision of their church that’s more countercultural, less wedded to the institutional Republican Party, more likely to see racial reconciliation as essential to the Baptist future and intent on proving that a traditional theology of sex need not lead to sexism.
.. Whereas Patterson’s defenders represent — again, to generalize — the more pro-Trump old guard in the Baptist world, with a strong inclination toward various forms of chauvinism and Christian nationalism.
.. It is not a coincidence that Russell Moore, perhaps the most prominent anti-Trump Baptist, provided early support to Patterson’s critics — while Robert Jeffress, whose Dallas church sets “Make America Great Again” to music, labeled the calls for Patterson’s resignation a “witch hunt.”
.. it’s wiser to regard an era of exposure like this one as a test, which can be passed but also failed. A discredited “old guard” doesn’t automatically lose power; a chauvinism revealed doesn’t just evaporate. And the temptation to dismiss discomfiting revelations as fake news, to retreat back into ignorance and self-justification, is at least as powerful as the impulse to really reckon with the truth.
.. So the question posed by this age of revelation is simple: Now that you know something new and troubling and even terrible about your leaders or your institutions, what will you do with this knowledge?