Risks rising in corporate debt market

OECD has released its Corporate Bond Markets in a Time of Unconventional Monetary Policy study, indicating the trends of corporate bond issuance by non-financial companies and making some comparisons to the pre-crisis situation. According to the study, global outstanding debt in the form of corporate bonds issued by non-financial companies almost reached USD 13 trillion at the end of 2018. Global corporate bond issuance averaged USD 1.7 trillion per year, during the period 2008-2018 compared to an annual average of USD 864 billion during the years leading up to the crisis.

Companies from advanced economies, holding 79% of the total global outstanding amount as of 2018, have seen an increase of their corporate bond volume by 70%, from USD 5.97 trillion in 2008 to USD 10.17 trillion in 2018. Moreover, the corporate bond market in emerging markets is not overseen. China, considered the leader of the relevant category, reached a total outstanding amount of USD 2.78 trillion in 2018, which marks a 395% increase compared to a decade ago.

Furthermore, differences between the present and the pre-crisis period are spotted on the risks and vulnerabilities in the corporate debt market. For example, the percentage of lowest quality investment grade bonds rose to 54%, while there is a decrease in bondholder rights that could amplify the negative effects in the event of market stress.

The paper expresses concern on global economic growth. The adverse possibility of highly leveraged companies facing difficulties in servicing their debt, combined with lower investment and higher default rates is presented to highlight the risk in case of a downturn. Gross borrowings by governments from the bond markets are expected to rise sharply, according to the recent OECD Sovereign Borrowing Outlook 2019. Analysts should bear in mind that the estimation for pay-back/refinance by non-financial companies in the next three years averages around USD 4 trillion worth of corporate bonds, close to the total balance sheet of the US Federal Reserve.