Corporate Debt Will Not be the Basis for Another Financial Crisis/Great Recession17th November 2018
The folks who remain determinedly ignorant about the financial crisis and Great Recession continue to look for another crisis where it isn’t. Much of the latest effort focuses on corporate debt. There are four big reasons why corporate debt does not pose anything like the same sort of problem that mortgage debt did during the housing bubble years.
First, many companies took on large amounts of debt for a simple reason, it was very cheap. The debt was not a necessity for them, but the opportunity to borrow for thirty or even fifty years at very low interest rates looked too good to pass up. As a result, many entirely healthy companies have large amounts of long-term debt on which they have very low interest payments. The ratio of corporate debt service payments to after-tax profits is at a relatively low (as in the opposite of high) level.
Second, the crisis mongers apparently missed it, but stock prices are very high right now. This means that most companies have the opportunity to raise more money by selling stock if they feel the need. Of course, the stock market could always plunge by 50 percent, but this one doesn’t factor into most crisis mongers’ predictions. As long as the market stays high, or even if it falls 20 percent, most companies would be able to sell shares to raise capital if they were facing trouble meeting their debt service payments.
The third reason corporate debt does not pose the same problem as mortgage debt is that even in a bankruptcy, debtors usually collect the bulk of their debt. It’s rare for a company facing bankruptcy not to still own valuable assets, such as a profitable subsidiary or land and buildings that can be resold. As a result, debtors might have to accept 70 or 80 cents on a dollar, which is a substantial loss, but far more than zero.
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