Financial Advice for Retirement, Social Security, IRAs and Estate Planning

A Warning About Leveraged Companies

November 14, 2018

A long time investment banker says there are a lot of companies that had too much access to capital. They took on too much debt. That’s going to hurt them as interest rates keep rising and the economy slows.

Moelis pointed to the current default rate in the high-yield bond sector as a warning sign. Currently, only about two percent of paper defaults. During the financial crisis, the default rate was above 10 percent. While 10 percent might not even seem that high, Moelis said the important point is that “there is a lot of room between two percent and 10 percent.”

The concerns Moelis has about levered companies is reflected in research from Moody’s Investors Service. Moody’s noted earlier this year that the ratio of corporate debt to GDP was at a record, and noted that the previous times the debt-to-GDP ratio was this high all coincided with market crises and recessions — 2009, 2001 and 1990. Yet in all of those previous three cases, the default rate posted was substantially higher — 11.1 percent, 10.5 percent, and 10.1 percent, respectively.

 

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