In the past year and a half of the tightening cycle in the United States, the Federal Reserve has tried to curb the corporate debt impulse with high interest rates, but some data show that American companies do not seem to retreat.
The data shows that since the first rate hike in early 2022, companies with investment grade credit ratings have added more than $500 billion in net debt, including big names like Pfizer and Meta that have significant influence on the U.S. economy.
And even non-investment grade and even junk-rated companies are increasing borrowing again this year, in contrast to the cautious stance of 2022.
It is also in contrast to global markets. European investment-grade borrowers added a much smaller amount of net debt over the period, at $150bn. In Asia, net borrowing by investment-grade companies fell by about $70bn.
High interest charges after 11 rate hikes haven't deterred U.S. companies from borrowing, and many continue to borrow cash from the bond markets to upgrade operations, expand their businesses and buy back shares. And this trend has been warned by some: the Fed may have to keep pushing up interest rates, from raising the risk of a deeper recession.
The rigid mindset of finance
Edward Altman, a finance professor emeritus at New York University, said the old borrowing patterns have become entrenched in corporate America, largely because the Federal Reserve has kept its benchmark interest rate low for so long.
He points out that many of the executives managing corporate balance sheets today started their careers in an era of easy money, making it difficult for them to change their mindset to adjust to tightening cycles.
But there are signs of danger. As leverage has risen, the interest coverage ratio, a key measure of a company's ability to pay, has gradually declined, increasing the pressure on companies to repay their debts.
It is worth noting that investment-grade companies are considered to be slightly less financially stable. Its average annual interest cost to borrow $1 billion in the U.S. high-grade bond market has risen to $63.7 million from $17.4 million at the end of 2020.
In particular, the deterioration of the health of less reputable companies has accelerated significantly. Defaults are already rising in some sectors of the speculative-grade debt market, such as real estate and retail. More than 150 companies with debts of at least $50 million have filed for bankruptcy in the United States this year.
Even investment-grade companies have suffered before, and the collapse of Silicon Valley banks earlier this year triggered a regional bank run.
Hans Mikkelsen, managing director of credit strategy at TD Securities, said that given the extreme performance of the borrowing boom over the past decade, corners of the market that seem safe may well be lurking in danger of causing a crash. Years of loose monetary policy mean the danger is high.