The Global Debt Problem

Make sure you have a way to monitor financial risk in public companies - if you aren't proactive, you may be facing trouble.

History indicates that a spike in defaults is coming.

The visual evidence shows that every peak in the ratio of debt-to-GDP is followed by a peak in defaults.

If this cycle repeats itself, the average default rate for U.S. public companies could soar past 12 percent, with estimated losses in excess of $1.2 trillion:

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Global debt is higher than it's ever been, driven by historically low interest rates.
Source: NYU Salomon Center and Federal Reserve Bank of St. Louis.

What the lines mean:

U.S. Non-Financial Corporate Debt-to-GDP (Quarterly)

  • The single largest driver of corporate risk is the amount of debt on the balance sheet. The blue line paints a picture of historical debt as a percentage of GDP
  • Since GDP has grown each and every cycle, the actual dollar level of debt today compared to 1991, 2002 and 2008 is much higher
  • The current value of U.S. Non-Financial Corporate Debt is approximately $9 trillion. This debt is held solely from public companies.

Annual Moving Average Default Rate for Corporate Bonds

  • This risk is squarely located within U.S. public companies, which represent a large portion of economic activity
  • In past credit default cycles, the average annual default rate for corporate bonds has maxed out at ~15%

It's time to face some uncomfortable truths:

  • With $9 trillion in public company debt and a 12% default rate, the estimated gross losses from this correction are likely in excess of $1.1 trillion for U.S. public company bondholders. The losses will be even more dramatic for suppliers and purchasers dealing with these defaulting public companies.
  • While bond or loan creditors have experienced typical recovery rates in the 40% ($0.40 cents on the Dollar) range, trade creditors have been lucky to receive 10% ($0.10 cents on the Dollar) recovery on their Account Receivables.
  • CreditRiskMonitor provides risk assessments for all of these public companies with 96% accurate bankruptcy predictions through the FRISK® score. There is no cheaper insurance policy available in the market!

This is a festering worldwide crisis.

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Nonfinancial Sector Vulnerabilities
Nonfinancial Sector Vulnerabilities shows the enormous exposure as a percentage of GDP across eight developed economies to low-quality/high-risk nonfinancial corporate debt. For example, China’s total speculative-grade debt and debt-at-risk is an estimated 75% of GDP in 2019. From 2009 to 2019, Chinese GDP has grown 108% meaning that high-risk nonfinancial corporate debt grew by 290% to go from making up 40% of GDP in 2009 to 75% of GDP in 2019. Therefore, Chinese high-risk nonfinancial debt has grown at roughly 2.7x the GDP over this period.
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EBIT-to-Interest Ratios
While nonfinancial corporate debt-at-risk has trended lower in some geographies, the percentage of public companies where interest expenses exceed operating profit (or EBIT) is still concerning. As the chart below depicts, the U.S. is among the most at risk, with more than 60% of small-medium U.S. enterprises having interest coverage ratios below 1X.