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.
