U.S. companies are set to start releasing second-quarter earnings tomorrow, but it’s against the backdrop of $1 trillion in new global debt that will be piling on this year in a bid to stave off the worst impact of COVID-19. That’s a massive 12% increase in global corporate debt for a single year, bringing the yearly total to well over $9 trillion, according to a new study of the top 900 companies in the world from Janus Henderson, as reported by Reuters.
How desperate is the situation? It depends on your comparative perspective.
For 2019, total global corporate debt rose 8%--but it wasn’t because of a pandemic, and they got something in return. Last year was a free-for-all of high-dollar mergers and acquisitions. This year, though, is a 12% debt spike that isn’t going to result in a payout for anyone. It’s pure disaster mitigation.
As companies the world over scramble to conserve capital and fortify balance sheets as COVID eats away at profits, they’re also setting debt issuance records, especially among the low credit rating crew--in other words, those companies that are higher-yield, but riskier.
While March saw lenders close their doors to the even slightly risky, they’ve been reopened, and borrowing is back with a vengeance.
The biggest debt chunks, as of 2019--pre-COVID--went to consumer basics and consumer discretionary industries, according to Janus:
And if you break down by country, Janus found that U.S. companies accounted for almost half of that total debt, coming in at $3.9 trillion. But again, that was all about M&A. Now it’s about COVID.
According to the Washington Post, via Bloomberg data, all this debt is a massive boon for underwriters. For the first half of 2020, fees for underwriting blue-chip company bonds in the U.S. doubled to more than $7 billion. At the same time, U.S. companies have sold more than $1 trillion in “high-grade notes”.
That makes debt trading incomprehensibly lucrative right now.
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Bloomberg notes that JPMorgan Chase saw its debut underwriting fees jump by $140 million just in the first quarter, and it’s due to report earnings on Tuesday, where analysts are expecting another record increase.
But that alone isn’t enough to ease Wall Street’s jitters about earnings that start coming in tomorrow. Also on Tuesday will be Citigroup and Wells Fargo, with Goldman Sachs and Bank of America later in the week.
While banks are raking in the underwriting fees and companies are greedily going for it, they’re also earning a lot less because of low-interest rates. There’s also a lot to make up for here, including the losses on real estate, credit card and car loans related to COVID.
So when Tuesday earnings start rolling in, what everyone will be on the lookout for is something that gives us a better hint as to how the economy at large is doing--and that usually comes from the banks because of their reach into every sector.
Goldman Sachs is warning that S&P 500 earnings per share could take a 60% hit for Q2 earnings. That would be worse than anything since 2009.
By Josh Owens for Safehaven.com
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