Corporate debt issuance has been on the rise in recent years, and demand from investors is spiking. Companies have taken advantage of the situation to issue bonds with low borrowing costs. But, as the FT explains, the money isn’t necessarily translating into economic innovation.
Corporations sold a lot of debt last week they sold so much in fact that they set a record for the most corporate debt sold in a week but if you think that means more investment going into the economy you may want to think again we have double the charts this week which means double the fun so let’s get started so let’s start with this large chart down here this
Data comes from deal logic and it shows the total amount of corporate debt issued each year going back to 1999 so it includes both high-yield and investment grade debt as with most charts that go back over the financial crisis you can kind of see the effects of that here with a large rise and then a large tumble but ever since then the issuance of corporate debt
Each year has been rising and that’s because if borrowing costs have been low now keep in mind this point right here is 2019 we’re not all the way through 2019 yet so even though each of these other observations contains the entire year’s worth of data we only have up until september for this data point so this potentially is going to rise over the course of
The year now if we were to zoom in on that data point we would get this chart right here which shows 2019 corporate debt issuance from january through the first week in september so this spike right here this is last week this was the record-setting corporate debt week that we observed so why did this suddenly happen when the levels of debt have been mmm a little
Bit more stable over the course of a year and then you have this shoot up well in august treasury yields were really low and so that meant that corporations were able to issue debt at a low interest rate which means the cost to them is much lower to borrow money why would investors want to buy debt at a low interest rate well remember that in other markets other
Bond markets there are negative interest rates right now so even if you’re getting a loan straight if it’s in positive territory and you’re an investor right now you’re thinking that might not be the worst deal to really unique things about this last week one was that usually when we see a bump in debt like this it’s because of some mega deal that’s happened but
That actually wasn’t the case it was just companies issuing debt they just saw an opportunity and they took it so for example apple sold 7 billion dollars in debt disney sold 7 billion dollars in debt and there was a little bit more of a concentration from us corporations issuing debt although remember this data contains the entire globe now let’s talk about the
Second interesting thing that has to do with this debt issuance normally when a company issues debt they do it so that they can take that money and invest it in new products or services that they offer so they’re expanding their business they’re investing in something new in the economy well actually with this issuance last week a lot of companies said they’re
Actually using the money to pay off old debts and essentially restructuring their current debt so that it’s over a longer maturity period so if you thought oh great all these companies they’re gonna be investing their money and new things for the economy well actually it may not be the case at the same time though that means that the total amount of leverage
That a company may have isn’t necessarily going up too much so if the total level of corporate debt out there worries you if you think ah this looks like something that could be a bubble that bursts in the case of a recession well you’re not necessarily wrong but remember that if that were to happen the first place that we would see it is in the high-yield debt
Market because remember high-yield debt refers to companies that are already in a situation where they’re gonna have a hard time paying back the money they owe so if you’re worried about it keep an eye on the high yield markets but as for now i see let’s wait and see what happens to the end of 2019 and see if this record week turns into a record year
Transcribed from video
Why companies issued a record amount of debt I Charts that Count By Financial Times
