Today’s post is based on an interesting piece, published by Advisor Perspectives, geared towards those who follow the capital markets space, specifically corporate bonds. It is not an area Mercator Advisory Group typically addresses; however, it is directly related to the pandemic and ongoing disruption to economic stability across the globe, which then leads to payments in some way, shape, or form. The author is a senior at a global investment firm.
Here’s an excerpt from the article:
‘US investment-grade corporate issuance has topped US$1 trillion year to date, putting it on track to plow through previous annual records. What are the real long-term effects of this explosive balance sheet growth? A closer look at net borrowing levels and why issuers borrow creates a roadmap of potential industry potholes to avoid….A trillion dollars in bond issuance in a matter of months is remarkable. The borrowing binge stemmed from a confluence of events, including coronavirus uncertainties, low interest rates, and the Federal Reserve’s expanded support of the corporate bond market. Issuance in and of itself isn’t good or bad, but sectors and industries that took on too much debt for their circumstances may face a tougher road post-COVID-19.’
The Fed is, of course, acting as a backstop for corporate liquidity through the outright purchase of debt and ETFs for lower tier investment grade securities. The author goes on to explain how certain companies in various sectors are using the bond issuance as an opportunity to hedge against potential liquidity needs as the economy gets back on its feet.
Others are in a more precarious situation and are perceived to be covering for shortfalls in free cash flow. This strategy is termed ‘obverborrowing’. The piece goes on to provide a couple of salient graphics around these points, explaining things like ‘recapture rates’ (ability to get sales back to pre-pandemic levels by 2022).
‘We’re most concerned about industries that overborrowed primarily to subsidize negative FCF or to re-lever and that have lower recapture rates. These sectors fall in the bottom left quadrant of our display. We believe that balance sheet damage from incremental debt may be more lasting for these industries and may make it hard for them to dig out of the resulting hole.’
Overall, the article is a good read and worth checking out.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group