A
recent article in Bloomberg highlights a potential threat to the bond market.
Recent years have seen a number of high-priced acquisitions funded by debt. As
a result, many of these companies have dramatically increased leverage as
measured by Debt/EBITDA. This has caused a drop in credit ratings, with $2.47
trillion worth of debt now rated as BBB, more than three times the 2008 level
of BBB debt. Even though many of the deals are funded through debt, a common
assumption is that synergies and the improved cash flow would allow the company
to quickly pay down debt. But a hiccup in the economy or synergies not
materializing could limit debt pay down. In the last three recessions, from 7
to 15 percent of investment grades bonds were downgraded to junk status. Given
the higher amount of debt with lower credit ratings, a recession in the next
couple of years could push a massive amount of corporate debt into junk
territory.
