The Big Picture
THE BIG PICTURE: CORPORATE DEBT: RETURN OF THE ZOMBIES?
in years, corporate insolvencies
0 1 2 3 4 5 6
percent 100 80 60
Time taken Recovery rate (rhs)
40 20 0
Source: World Bank, IIF
Mona Dohle looks at what the end of central bank interven- tions could mean for corporate debt.
Defined benefit (DB) pension schemes have turned bullish on corporate bonds despite fears that defaults could soon rise. In the past 12 months, around 30% of final salary schemes have increased their exposure to an average of a third of their fixed income portfolios, with a further 20% telling Aon that they intend joining them.
The attractiveness of corporate debt relative to equities is a fac- tor. Indeed, US high-yield bonds return around 2% above equi- ties, the highest level of divergence since 2008’s crash. Unsur- prisingly, the surge in demand has coincided with a spike in issuance with a record $1.9trn (£1.4trn) added to the debt pile in September, according to Refinitiv. This brings the size of the US’ corporate debt market to almost $10trn (£7.7trn), or half the country’s GDP. Even before the Covid crisis concerns about the sustainability of such debt were mounting on the back of around 50 defaults
12 | portfolio institutional October 2020 | issue 97
last year. This figure has more than doubled in 2020, accord- ing to S&P Global. Yet it is believed that the default rate has been contained by central bank interventions and delayed corporate reporting due to the pandemic. France has reported a fall in default rates, which is largely due to delayed reporting due to the lockdown. Those holding the debt of companies in other countries, including Spain, Belgium and Italy, have benefited from gov- ernment changes to insolvency laws to keep rates low. Creditors have also been boosted by central bank interventions. The ECB has committed to boosting its corporate bond portfo- lio by €750bn (£684bn), while the Federal Reserve is to spend $750bn (£580bn) buying company debt. However, the pro- gramme expires at the end of the year. While these policy measures appear to have softened the initial blow of the pandemic, with the expiry of government subsidies across Western markets on the horizon, investors may soon see a return of the zombies, and potential headaches for the years to come.
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