Is There Too Much Corporate Debt?

A common refrain among policy experts is that the corporate debt level is too high. In fact, from 2008 to 2018, corporate debt rose from $2.3 trillion to $5.2 trillion, debt-to-EBITDA has risen, and there has been an increase in the number of companies with junk-rated bonds. So is there really too much corporate debt? A recent article from McKinsey indicates that current debt levels may not be as dire as many would lead you to believe. For example, even though the number of companies with debt rated below BBB- has increased, it appears that the reason is not a general lowering of credit rating, but rather an increase in the overall number of rated companies and companies that previously issued unrated debt now being rated. And while the debt-to-EBITDA ratio has increased, the EBITDA-to-interest ratio for most industries has remained stable over the past 10 years.

In short, it may be that the fear of too much leverage in corporate America is overblown. However, as the article notes, companies should still undertake stress testing to exam the risks associated leverage. If you are not familiar with stress testing, it is similar to scenario analysis in capital budgeting, except we focus on the worst case analysis. Stress testing can indicate scenarios that would place a company in financial distress, allowing for prior preparation if these circumstances should arise.

IBM's Bond Offering

IBM recently issued $20 billion in bonds, the seventh largest bond offering in history. The bonds were issued at 1.45 percent above Treasuries. Offers for the bonds totaled $40 billion. The funds from the bond issue are to be used for the acquisition of Red Hat, which recently received regulatory approval. T-Mobile USA and Fidelity National are expected to announce large bond offerings soon to fund acquisitions as well.

An Uber IPO

Car ride service Uber went public today and it was anything but a smooth ride for investors. The stock went public at $45 per share, at the low end of the range. The stock opened at $42, climbed back to $44.85, before closing at $41.57, a drop of almost 8 percent from the IPO price. Uber's first day of trading mirrors that of competitor Lyft, although Uber's price drop wasn't as bad as Lyft's. Of course, neither company has turned a profit to date and both are burning cash at a high rate. Even with these concerns, Uber is still valued at about $76 billion.

Bankruptcy Contagion?

Brazilian airline Avianca Brasil filed for bankruptcy restructuring in December, which is not an unusual event. However, Avianca Brasil licenses its name from Avianca Holdings SA, a Colombian airline. Avianca Holdings is a larger company, although the companies are owned by brothers. In a recent SEC filing, Avianca Holdings stated the close association between the companies “could generally result in an overall decrease in customer confidence, any of which could lead to a significant loss of business.” Whether this loss of costumer confidence occurs to Avianca Holdings occurs is yet to be seen, but Avianca Holdings also may be forced to take on four airplanes that it subleased to Avianca Brasil.