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.
