Corporate America has quietly DOUBLED its debt levels since 2008
The debt has been raised by American firms both to fund mergers and acquisitions and to buy back their own shares.You can see from the chart that despite seven years of zero interest rates and quantitative easing, even interest payments have climbed by nearly 40% since 2008.
Here's how it looks:
Of course, that's not the whole story - debt is only important when it's compared to a company's ability to service and repay it. For corporate America's real debt burden to have doubled, earnings would have had to stay completely still.But even when it's compared to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), net debt is 30% higher than the average over the last 10 years.Though interest rates are likely to stay low for a long time even after the Federal Reserve starts hiking rates for the first time since the financial crisis, the extra debt accumulated will be an increasing burden if earnings don't keep up.
Here's a snippet from the Goldman note:
Following the crisis, imbalances of all types have been created. Chief among them, in our view, is the re-leveraging of America and the quiet growth of goodwill, as a percentage of assets on balance sheets. While neither poses an immediate terminal risk to the health of corporate America the changing nature of corporate balance sheets does raise the question, again, about the lack of organic growth and reinvestment post the crisis. Taken a step further, the spectre of rising rates, potential global disinflation (dare we say "deflation"?), declining operating profits and wider credit spreads continues to create near-term consternation for weak balance sheet stocks.
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