Special Report

Shutdown: The Coronavirus

US corporate debt soars during coronavirus outbreak

The New York Stock Exchange on Wall Street. Photo by@MayFayStudio via Twenty20

In 2019, the Walt Disney racked up a record revenue of nearly $ 70 billion. Now, the company is hobbled by the coronavirus that has shut its theme parks, movie theatres and wiped out 90% profit.

To survive the crisis, Disney borrowed $11 billion by selling bonds, joining a growing list of investment-grade companies that have issued over $1 trillion in the first five months of the year.  The amount, equivalent to the worth of bonds sold in 2019, adds to the $10 trillion of the US corporate debt and worries economists, who say some of the debt will blow up and make the economic recovery tough.

 “Corporate debt issuance is crazy at the moment,” said Anthony Karydakis who teaches financial markets at New York University’s Stern School of Business.

Of the $1.038 trillion, debt worth $706 billion was issued by the investment-grade companies between late March and May. The frenzy triggered by Federal Reserve chief Jerome Powell’s announcement that the bank will buy corporate bonds to prop up companies hit hard by the economic shutdown induced by the coronavirus outbreak.

A total of  724 businesses filed for bankruptcy in May, up 48 % as compared to the same month in 2019, said a report by legal-services firm Epiq Global. Among them were major companies like J.C. Penney Co., Neiman Marcus Group Inc., J. Crew Group Inc. and Hertz.

Karydakis said Fed’s “unprecedented” decision to buy corporate bonds was like a “lifeline” to the troubled companies who went on a borrowing binge.

Embattled aircraft maker, Boeing, raised $25 billion in its April offering while oil giant, Exxon Mobil sold $18 billion in bonds after oil prices tanked. General Motors, Ford, General Electrics and others have issued debt in enormous proportions.

Jim O Sullivan, Chief US Macro Strategist at TD Securities, said more corporate debt is “adding to the financial instability down the road.”

“The companies know the Fed is going to keep the interest rate zero for years and years. This helps the borrow at low interest,” said Sullivan. “Already the level of corporate debt was a record high and more borrowing would add to the vulnerability.”

Karydakis and Sullivan agree that Fed’s decision was much needed to salvage the corporations, but they say risk down the road is that some of the debt will blow up.

“You don’t have only GM and other investment-grade companies, but also less-than-stellar rated companies. If they are not outright junk but borderline junk. Some of that debt at some point will not make it,” Karydakis said.

The bonds of many investment- grade companies, like Royal Caribbean, were downgraded to junk status after the pandemic wrought havoc with their business. After raising $3.3 billion, the cruising line has announced to borrow more.

Investment grade is a rating assigned to a company’s bond, which means it involves a low risk of default. Junk bonds are a high-risk debt issued by a financially troubled firm or a start-up. They are also called high-yield bonds.

The Fed has said it will buy investment-grade as well as junk bonds.

Issuance in the US junk bond market through June 12 was a 15-year record high. It was tracking at its busiest pace for any June on record, with $23.88 billion priced through June 12, accordingto S&P Global.  It’s not the only beleaguered business but healthy companies that are scooping up low-interest loans.

Netflix, which benefited from the growing subscribers due to the lockdown, issued $1 billion in bonds to finance more shows and movies. The streaming giant has been issuing bonds before to boost its liquidity. Oracle also raised $20 billion by issuing investment-grade bonds.

Karydakis said if debt issuance stops now, the chances of the US economy to survive will be grim.“Jerome Powell (the Fed chief) has identified this as a risk but didn’t make it as an argument that he would like the debt issuance to stop,” he added.

“It’s a little bit of a trap situation. He is in the middle of throwing the kitchen sink at the whole thing to keep the economy floating,” he said.

 

 


Tags


Other Stories in Special Report: Shutdown: The Coronavirus

Life returns to the East Village

Quincy Walter May 5, 2021

Reopening for Ramadan

Hassan Abbas May 4, 2021

And the band played on

Xavier Bartaburu May 2, 2021

Queens residents mourn at Covid vigil

Annie Burky May 2, 2021

Floating for Free: COVID and the Staten Island Ferry

Trish Rooney May 2, 2021

COVID-19 has left many Black and Hispanic landlords in serious debt

Norah Hogan April 24, 2021

Village East movie theater reopens to the public

Inga Parkel April 13, 2021

Chinese adoptions halted by COVID

Inga Parkel March 24, 2021

Remote is the new workplace normal

Courtney Guarino March 24, 2021

One year of COVID-19 in New York City

Michelle Diaz March 16, 2021

COVID long haulers deal with lingering symptoms and doubt

Kaity Assaf March 5, 2021

Pandemic Weddings

Chuyan Jiang March 2, 2021

Pandemic fatigue 101

Chuyan Jiang February 28, 2021

Yankee Stadium becomes COVID-19 vaccine site for Bronx residents only

Michelle Diaz February 24, 2021

The queer community rallies behind their sacred spaces closed because of COVID-19

Inga Parkel February 23, 2021

Street vendors struggle as New Yorkers and tourists stay home

Norah Hogan February 13, 2021

Keeping the faith in COVID-19

Courtney Guarino February 3, 2021

Little Italy’s restaurants need indoor dining to survive pandemic

Michelle Diaz February 2, 2021

Stray pets find homes and love during pandemic

Inga Parkel February 1, 2021

No Actors, But the Show Goes On

James Pothen December 5, 2020

New York City, a place of refuge 

Edith Rousselot December 4, 2020

Commuting in a pandemic world

Michelle Diaz December 3, 2020

Battling food insecurities during a pandemic

Courtney Guarino December 3, 2020

Adaptation

Justin McGown December 3, 2020

Honk!: Cars earn a special spot in 2020

Luana Harumi December 3, 2020

Working out looks very different during a pandemic

Chuyan Jiang December 2, 2020

One kitchen’s transformation in the age of isolation

Isabel Beer December 2, 2020

Nursing homes are filled with sadness and loss during pandemic shut down

Inga Parkel December 1, 2020

The show goes on

Norah Hogan December 1, 2020

Loyal members help keep independent cinemas afloat

Courtney Guarino December 1, 2020

Musicians deal with the reality of no live shows as covid takes center stage

Paola Michelle Ortiz December 1, 2020

 Black Friday’s Aftermath

Sughnen Yongo-Okochi November 30, 2020

The Spirit of Little Haiti

Savannah Daniels October 14, 2020

Small business owners hope for future relief

Courtney Guarino October 2, 2020

Brooklyn Book Festival held virtually

Chuyan Jiang September 28, 2020

NYC Restaurant owners worry about maintaining business during winter 

Isabel Beer September 27, 2020

The pandemic is causing mental health struggles for many Latinos

Paola Michelle Ortiz September 24, 2020

Politically divided family can agree on one thing, rallies are bad during a pandemic

Michelle Diaz September 23, 2020

New Yorkers are vulnerable to mental issues due to pandemic

Sughnen Yongo-Okochi September 23, 2020

Healthcare professionals struggle with Trump’s decisions during pandemic

Tori Luecking September 23, 2020

Some Americans Say “Not So Fast” on Operation Warp Speed

James Pothen September 23, 2020

Trump voters unfazed by morality of Trump’s Covid response

Norah Hogan September 22, 2020

Trump rallies continue, despite the rising Covid-19 death toll

Isabel Beer September 22, 2020

Latinos weigh in on President Trump’s management of the pandemic

Paola Michelle Ortiz September 21, 2020

Fast track vaccine causes fear

Kaity Assaf September 21, 2020

It’s business as usual at McSorley’s Old Ale House

Tori Luecking September 20, 2020

Trump defiance to hold indoor rallies amidst COVID-19 sparks polarized responses 

Courtney Guarino September 20, 2020

NYC Cafes and restaurants try and survive the pandemic

Isabel Beer September 19, 2020

A typical afternoon at Shade Bar NYC

Kaity Assaf September 19, 2020

West Village staple, Caffe Reggio, remains open for outdoor dining in the wake of coronavirus restrictions 

Norah Hogan September 19, 2020