The era of bulk money leaves the trail of US corporate debt junkies

NEW YORK (Reuters) – Many US companies that have taken on less expensive debt over the past decade have found themselves chained, spending much of their income on paying back lenders instead of investing in their businesses. or to hire.

While small businesses, which together account for half of employment in the United States, are beginning to feel the problem, this could have a deterrent effect on hiring, wages and consumption, which would worsen financial markets and slow global growth, according to economists and corporate finance professionals. .

The number of companies facing debt stands near the highest records. About 17 percent of publicly traded US companies had difficulty paying their interest on debt at the end of last year, compared to less than 10 percent in 2010 and more than 20 percent in 2016, according to the report. Institute of International Finance Inc., a trade group for financial institutions.

In value, these companies represent a fraction of the companies monitored by the IIF. But they illustrate the struggles of a larger group of private companies that have accumulated so-called leveraged debt, usually variable rate loans offered on generous terms by both bank and non-bank lenders.

With Fed interest rate hikes leading to higher interest costs and a slowing US economy on the verge of economic slowdown, more and more borrowers are likely to struggle to stay afloat.

"It could reduce capital expenditures, deploy capital badets and block the economy, because companies could be so focused on paying down their debts that they might not be able to hire," said Christopher Zook, director. investments at Family Office CAZ Investments LLC.

Take CPI Card Group Inc, which manufactures credit and debit cards for banks and retailers. The card manufacturer was one of the companies that operated the leveraged loan market when it borrowed $ 435 million for general purposes before becoming public in 2015.

CPI has repaid a portion of the loan with the proceeds of its takeover bid, but as its profits deteriorate, the company has almost lost its ability to service the remaining debt. According to Moody's Investors Service, its earnings for 2018 roughly matched its debt spending, nearly five times higher than in 2014.

The company has reduced its workforce by 13% between 2015 and 2017 to reach 1,200 workers. Last year, the state's Ministry of Labor and Employment closed a plant in Littleton, Colorado, where its headquarters are located.

As Americans complete the switch to smart credit cards, CPI revenues are expected to increase in 2019. But the forces that have curbed it will persist: the credit card maker loses shares of market for the benefit of its competitors and high inventories help the big banks to maintain their prices. low, says Stephen Morrison, an badyst at Moody's. CPI Card declined to comment.

EASY CREDIT

Investors' quest for higher returns in a time of record interest rates has allowed indebted companies access to easy and cheap credit, inducing them to take on more debt than would be possible under less lenient.

As a result, the median debt levels of non-financial corporations in relation to their profits already exceeded those before the last financial crisis, according to the rating agency Standard & Poor's.

While US policymakers ensure that credit conditions remain healthy overall, the volume of leveraged loans, clbadified as junk or quasi-junk, has doubled to a record $ 1.4 trillion in the past five years. years.

"The leveraged loan market can be considered a canary in the coal mine for the US economy," said Jeremy Swan, senior director for financial sponsors of the accounting firm CohnReznick LLP.

The Rite Aid Corp drugstore chain is another example of how the initial relief offered by such loans has become a burden. The Pennsylvania-based company borrowed more than $ 1 billion on flexible terms in 2013 to refinance an old debt, according to Refinitiv data.

The rating agencies welcomed the funding at the time because it would help the channel, even if it remains heavily indebted and faced with uneven sales, reduce its interest costs.

Yet, the burden of debt has been too heavy in the years to come.

"They could not grow because they had so much debt," said Mickey Chadha, Credit Manager at Moody's Investors Service. "They did not have the cash and the capital to invest in their stores."

Last year, the retailer, after two unsuccessful sales attempts, sold about 1,900 stores to its rival Walgreens Boots Alliance Inc. to reduce its debt while the e-commerce boom set its sights on tough test.

According to the company's annual reports, the number of badociates employed by Rite Aid declined slightly from 89,000 to 87,000 as it struggled to repay the debt. The number of its stores has fallen to 4,536, from 4,623 to 4,536.

After the sale to Walgreens Boot Alliance, Rite Aid had 2,550 stores and 59,000 employees. His shares are trading below $ 1, although he has recently announced his intention to proceed with a stock consolidation.

"Rite Aid has made significant progress in reducing the company's debt as well as in simplifying and strengthening its capital structure in recent years," said the retailer in a statement.

The company has recently announced to be refinanced, pushing back the maturities by 2023 and clearing a rise in interest rates. It also has approximately $ 1.9 billion in cash, "offering great flexibility to operate and invest in (its) activities".

Economists argue that generous lending terms allow heavily indebted businesses that might otherwise be bankrupt to continue their operations, but the withdrawal of firms from their investments and hirings may exacerbate an anticipated slowdown and hurt non-core lenders. small-cap banks.

"This is a fault line in the ecosystem that threatens the entire economy," said Mark Zandi, chief economist at Moody's Analytics. "I do not know if we should send the red lights, but [definitely] yellow lights. "