Daily Management Review

S&P fears new debt crisis


Rating agency Standard & Poor`s recorded a negative trend in the corporate sector: companies have reduced revenue. At the same time, the debt burden is growing. The agency analysts believe that if this trend continues, this could add to the probability of recession in the United States, likelihood of which, according to S&P, is 30–35% for the coming year.

Yesterday, analysts at Standard & Poor`s rating agency published a study entitled “Next Debt Crisis: Earnings Recession Threat.” As part of the study, experts analyzed dynamics of revenue and debt burden in 20,071 non-financial medium-sized companies. In their opinion, "such companies are more likely to become an alarming call compared to large corporations."

It is reported that the total debt burden of the analyzed companies is $ 30 trillion, which is equivalent to two fifths of the total debt burden on the US non-financial corporate sector ($ 73 trillion).

Analysts noted that the situation with corporate debt burden worsened in 2019: among non-financial sector companies, it grows faster than the revenue of these same companies. This may result in lower profits, which, in turn, will affect the entire economy. S&P notes that the analysts have already increased the likelihood of a recession in the United States in the next 12 months to 30–35%.

The agency explains the increase in the debt burden on the corporate non-financial sector in 2019 by the events of the end of 2018. In October, the US Federal Reserve System announced continuation of monetary policy tightening. Consequently, some investors fled the higher-risk market. When at the beginning of 2019 the Fed changed its policy and began to talk about “lower rates for a longer time,” this caused a new growth in interest in borrowing, both from borrowers and lenders.

Against the background of growing debt burden, the growth in company revenue is declining: S&P notes the sharpest decline among companies in the Asia-Pacific region, which is associated with a slowdown in the Chinese economy due to trade wars. A decrease in revenue is also observed in the US corporate sector, while the situation is stable in Europe and Latin America.

Speaking of forecasts for the regions, S&P expects that corporate revenues begin to grow in Asia, Europe, Latin America and Africa in the next two to three years. In turn, North American companies may begin to reduce their debt burden as activity in the M&A market is decreasing, accompanied by an accumulation of borrowed funds for acquisitions. In the event of a recession, a reduction in revenue in the corporate sector can nullify an improvement in the debt burden.

Speaking about industries, S&P sees the greatest risks in the car industry, consumer market and retail. Expectations of a speedy recovery in car sales in China did not materialize, which raises concerns among a growing number of experts regarding the global market, one of the drivers of which is China. As for the consumer goods sector, S&P is worried about weak sales growth prospects and liquidity problems, including difficulties in refinancing for market participants. Speaking about retail trade, analysts note a continuing decline in activity in the United States, despite the aggressive reduction in prices by retailers, which, in turn, beats their profitability. In Europe, the premium goods market is under increasing pressure amid two years of ongoing problems in the department store and retail clothing sectors.

source: standardandpoors.com