By David J. Lynch March 10, 2020 washingtonpost.com/business
* "Zombie" Firms: do not earn enough to cover their interest payments
The coronavirus panic could threaten a $10 trillion mountain of corporate debt, unleashing a cycle of layoffs and business spending cuts that would hit the economy just as some analysts are warning of a recession.
Financial markets already are showing signs of major stress. Investors are demanding higher interest payments in return for lending to less creditworthy companies; some businesses are delaying their planned bond sales while they wait for Wall Street to settle down; and ratings agencies are moving toward downgrading the shakiest corporate borrowers.
The mammoth debt bulge includes a significant increase in borrowing by the lowest-quality investment grade firms -- those rated just one level above “junk.” More than $1 trillion in “leveraged loans,” a type of risky bank lending to debt-laden companies, is a second potential flash point.
Watchdogs including the Federal Reserve have warned for years that excessive borrowing by corporations, including some with subpar credit ratings, might eventually blow a hole in the U.S. economy. Now, as Wall Street wrestles with a global epidemic, the debt alarms show how investors are reassessing risks they overlooked during the long economic expansion.
“It is a big concern,” said Ruchir Sharma, chief global strategist for Morgan Stanley. “We’re dealing with the unknown. But given the enormous increase in leverage, the system is fragile and vulnerable.”
Energy companies that have borrowed heavily in recent years may be the first to suffer, as a result of the oil price war between Saudi Arabia and Russia. Falling oil prices, while good news for consumers, may reach levels that will make it impossible for companies in the U.S. shale industry to cover their costs.
On Monday, investors battered some energy companies that have big outstanding obligations. Shares of Halliburton, which has more than doubled its total debt to $11.5 billion since 2012 despite sliding revenue and earnings, lost 38 percent of their value.
The oil field services company last week raised $1 billion by selling investors 10-year bonds paying interest of 2.9 percent. Halliburton said it plans to use the proceeds to pay off existing debt. Over the next six years, it faces $3.8 billion in debt payments.
Today’s debt woes originated in the months that followed the September 2008 Lehman Brothers collapse.
In response, the Federal Reserve cut its benchmark lending rate to zero and kept it at or near historic lows for a decade. The aim was to heal a wounded economy, but the era of easy money bred excesses that only now are coming into view.
Access to low-cost credit helped many companies grow and hire. But it also enabled some that weren’t profitable to survive by repeatedly refinancing their debt. These “zombie” firms, which do not earn enough to cover their interest payments, account for one in every six publicly traded U.S. companies, Sharma said.
Link to full article: https://www.washingtonpost.com/business/2020/03/10/coronavirus-mark...
The part emboldened at the bottom is an ominous quote, indeed. Unprofitable companies repeatedly refinancing debt to survive. THAT is a large part of the U.S. shale industry. And one out of six publicly traded U.S. company is a zombie company? Sheesh, that is a huge number. This might be the straw that broke the camel's back regarding a horrific day of reckoning for the global economy due to the continued expansion of debt.
The debt bubble appears to extend far beyond the O&G industry. We've seen this scenario before and our elected leaders over the years since have abandoned the rather weak financial reforms meant to avoid another Great Recession. I don't think the American tax payer will support another Wall Street bail out.