Loans and bonds can be used sensibly to invest but too much debt can be catastrophic for a company, especially if the economy goes south.

Author: Luca Ventura

Expansion, diversification, growth: these things cost money. After the 2008 global financial crisis, there was a universal imperative: get out of debt. The opposite has happened. Central banks around the globe pushed interest rates to historically low levels and companies responded by borrowing more than ever. Not only has corporate debt grown, the quality of that debt has gotten dramatically worse. During the recovery period began in 2010 until the end of the decade, Standard & Poor's estimated that the share of investment-grade bonds fell to about 77% from over 90% during the previous two post-financial crises. In the meantime—as the IMF pointed out in the April 2020's edition of the Global Financial Stability Report—while risky credit market segments such high-yield bonds and leveraged loans have expanded to reaching $9 trillion globally, borrowers’ credit quality, underwriting standards and investor protections have weakened. Just months ago, the economists of the Fund were issuing another warning: in a recession half as severe as the 2008 financial crisis, risky corporate debt could more than double to $19 trillion, equivalent to nearly 40% of total corporate debt in OECD economies.

Sadly, that is precisely the point where we are today—with the major difference that the global economy has never seen a recession quite like this. Faced with the devastating impact of the COVID-19 pandemic, many are already the less-solvent companies that had to declare bankruptcy, many more will follow suit in the months and years to come when their debts come due. How many? Junk bond default rates are likely to rise to 10% during the 12 months-period since the beginning of the crisis, S&P Global Ratings projects, more than triple the rate of 3.1% in 2019. A protracted recession could make things even worse, putting the figure as high as 13%. One could argue that the pandemic did not create the economic crisis—it merely triggered it.

The remedy? Once again, the primary tool employed by central banks to boost the economy and thwart a domino-like chain of defaults has been lowering interest rates—and companies that have borrowed money for years to either stay afloat, refinance debt or buyback their shares are now doing it again. Their revenues have been obliterated, but their debt has only soared. Not just that, companies have issued billions in bonds and notes, a record number of which of the lowest rating, amassing even more debt that they may never be able to repay. At this rate, speculative-grade non-financial global debt is set to surpass investment grade in 2024, S&P says—the implication being that as we try to fix the current economic crisis we might be setting the conditions for the next one.

Let us be clear: while the side effects of too much easy money can be catastrophic, not all debt deserves a bad name. Loans and bonds can be used sensibly to invest, hire and increase productivity. Furthermore, a higher amount of debt in absolute terms—while not desirable—does not translate automatically in an equally higher risk of defaulting on it. Small companies, in fact, tend to become cash-strapped more easily than their larger counterparts, with some sectors that can be more vulnerable than others. And while today the majority of the world's biggest corporate borrowers—even in such uncertain times—can be trusted to repay their debt, it is also true that during the past economic recession many giants have fallen from grace in the blink of an eye. Just ask General Electric.


1. AT&T 

AT&T is no longer just a phone company. After the purchase in 2015 of Direct TV and the acquisition of Time Warner in 2018, the telecommunications giant was left with a net debt in the neighborhood of $180 billion and the not-so-coveted title of most indebted company in the world. While AT&T's efforts to gradually reduce debt levels have been paying off, in May the telecom giant announced that it was raising another $12.5 billion via a bond sale to refinance a portion of its outstanding debt and boost liquidity.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
147.2 179.1 Baa2 BBB A– Telecommunications and Consumer Services

2. Ford Motor Company

If the pandemic impacted all automakers around the globe, it had particularly crippling effects on the once-glorious American carmaker. Drowning in debt, low on cash and facing increasing competition, the company founded in Michigan in 1903 is inches away from bankruptcy. With sales plummeting and its factories partially shut, in March Moody's and S&P lowered Ford's credit rating from investment-grade to speculative-grade or junk—Fitch followed in May. Not only Ford is going to find more difficult to obtain funding in the future but, as most investment and pension funds are not allowed to hold junk bonds as part of their portfolio, the inevitable sell-off will only increase the risk of Ford defaulting on its debt.

Long-Term Debt 

 ($ Bil.)

Annual Revenue 

($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
114.4 149.9 Ba2 BB+ BB+ Industrials

3. Verizon

In 2013, Verizon launched the largest corporate debt sale in history: $49 billion worth of bonds used to fund the buyout of partner Vodafone Group’s 45% stake in Verizon Wireless, the largest mobile telecommunications provider in the United States. While the company has taken significant steps to shrink its debt, it also had to divert resources into building out its 5G wireless infrastructure, which allows to exchange data at greater speeds. The pandemic, the company's CEO Hans Vestberg said, only proved the soundness of this strategy. Down the road, the expected economic boom from the new networking standard should accelerate the company's debt reduction.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
106.5 131.4 Baa1 BBB+ A– Telecommunications and Consumer Services

4. Comcast

The largest cable TV company and Internet service provider in the United States has been on 20-year shopping spree. In 2002 it acquired the assets of AT&T Broadband, in 2005 United Artists and its parent company MGM, in 2011 NBCUniversal, in 2016 DreamWorks Animation. However, it was with the $40 billion takeover by British pay-TV group Sky that the company entered the $100 billion debt club. Comcast has been diligent in cutting operating costs ever since but—amid competition from online streaming players such as Netflix and Amazon—increasing its paid TV subscriber base has been challenging. No doubt, when the pandemic struck the company saw a tremendous uptick in its cable unit's traffic and in Wi-Fi data usage.  The costs associated with customers' connectivity, however, increased too, and revenues from the scheduled theatrical releases of its studio Universal Pictures were entirely erased.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
105.7 108.7 A3 A– A– Telecommunications and Consumer Services

5. Pemex

The state-owned Petróleos Mexicanos (Pemex) is the world’s most indebted oil company and it is in trouble. Although its proven reserves—after years of constant decline—jumped recently due to the discovery of a large oil deposit, production has fallen by half since a peak of 3.4 million barrel a day in 2004, with dire consequences in terms of revenues. Furthermore, just when the Mexican government's effort to reduce the company's outstanding balance had started bearing some fruit, the already low oil prices dropped even further and the pandemic struck. Rating agencies had already cut the company's debt to junk when Pemex reported a $23 billion quarterly loss in May, one the biggest in corporate history. Many oil companies across the globe are currently facing similar issues—starting, further South in Latin America, with Brazilian Petrobras and its equally crushing $77 billion debt load.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
104.8 74.3 Ba2 BBB+ BB– Oil & Gas

6. Evergrande Group

With projects in over 200 cities ranging from condos to theme parks, one of China’s biggest—and the most indebted—property developer just burns through cash. In recent years, and more so since the global pandemic started, Evergrande Group's investors have been bruised by the company's stock performance and become doubtful about its ability to repay debts. Even less encouraging has been the firm's planned strategy to navigate this difficult phase. The company announced it wants to become the world’s "largest and most powerful" electric-vehicle maker within the next 3—5 years. While at it, it will also build the world’s largest football stadium. Poised to hold an incredible 100,000 seats, construction has already begun in the city of Guangzhou at an estimated cost of $1.7 billion.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
100.0 67.0 B1 B+ B+ Financials

7. Anheuser-Busch InBev

Belgian brewer Anheuser-Busch InBev has built a sprawling beer empire on debt. Over the past two decades, it has launched a slew of acquisitions that added hundreds of brands to its portfolio, making it the undisputed leader in the industry. However, the takeover of rival SABMiller in 2016 left the company with over $100 billion in debt. Today, Anheuser-Busch InBev controls about 25% of the world beer market. To pay off that debt, consumers will have to drink a lot more beer than they are today—which is quite unlikely when people are social distancing. During the month of April, the company revealed, global sales volumes dropped 32%.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
95.8 52.3 Baa1 BBB+ BBB Consumer Goods

8. Softbank

The Japanese tech-investment mammoth owns stakes in WeWork, Sprint, Uber and many other household names. As its portfolio has grown over time, so has its debt. While the investment fund's complex structure makes it difficult to determine how much debt it carries, it is big and difficult enough to repay for global rating agencies to consider it one step below investment grade, or junk. The calamitous IPOs of WeWork and Uber's underwhelming market debut are not helping matters. Earnings for the fiscal year ended on March 31 revealed a stunning $18 billion operating loss for the Vision Fund—a tumble that SoftBank CEO and founder Masayoshi Son explained by saying that his tech unicorns had fallen into "the valley of the coronavirus."

Long-Term Debt ($ Bil.)

Annual Revenue ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
93.4 44.7 Ba3 BB+ N/A Financials

9. Apple

With a cash reserve of almost $200 billion, why would Apple borrow money? Answer: because it is cheap. Just last year, Apple sold $7 billion in 30-year bonds on which it will pay just under 3.0% in interest. Adding its name to the long list of firms borrowing debt during the pandemic, the technology company did it again in May, when it raised $8.5 billion by selling four different types of bonds at some of the lowest rates it has paid in a decade. The tech giant takes advantage of such low premiums to bolster its cash flow, fund share buybacks, pay dividends. Another very good reason for Apple to continue borrowing is that issuing debt remains cheaper than bringing back home all the money that the company keeps in its international reserves.

Long-Term Debt   ($ Bil.)

Annual Revenue      ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
89.7 268.0 Aa1 AA+ N/A Telecommunications and Consumer Services

10. General Electric

The company founded by Thomas Edison in the late 19th century back has experienced a long, dramatic decline. In 2000, the venerable industrial conglomerate was the most valuable company in the world; by 2018, it was booted from the Dow Jones Industrial Average. A long string of ill-timed acquisitions coupled with a global recession meant that paying down rising debts became impossible. Last year, General Electric announced it was selling part of its healthcare division to Danaher for nearly $20 billion to put towards debt reduction. That helped reduce by almost a quarter of total overhang, but the outlook for GE remains bleak. In April, the company reported a 24.8% drop in year-over-year revenue, with all divisions except healthcare reporting losses and its aviation business announcing a 25% permanent reduction of its global workforce. The sale to Danaher, also, might not have been the best move: not only the biopharmaceutical division—which has been renamed Cytiva—remains extremely profitable, but it is at the forefront of a string of promising companies working on a vaccine for Covid-19. 

Long-Term Debt

($ Bil.)

Annual Revenue

 ($ Bil.)

Debt Ratings

Industry

    Moody's S&P Fitch  
67.0 93.5 Baa1 BBB+ BBB

Industrials