Staple companies see debts climb

Blue-chip companies have begun to ramp up borrowing again as central banks globally flood economies with money. Liabilities have reached their highest level relative to income since 2009, according to investment banking company Morgan Stanley’s analysis of second-quarter data.

The number of companies selling investment-grade debt in September has surged 63% from the same period last year.

Last year, and at the beginning of this year, corporations ranging from Verizon Communications to Tupperware Brands talked about their goals to cut debt levels. Companies were under pressure from both stock and bond investors who worried about borrowers’ liabilities. Around 40% of investmentgrade companies now have obligations that are more consistent with junk ratings, according to Morgan Stanley. Credit raters use multiple factors beyond leverage to assess a company’s debt rating.

For many companies, debt levels are now creeping higher, either by choice or involuntarily. Revenue is under pressure, and money is easy to raise. That tempts corporations to borrow to fund share buybacks and other moves that can boost earnings measures.

The rising debt burdens that have resulted could make it harder for corporations to navigate any downturn that may be coming. Companies could find themselves with less cash to pay their obligations, and refinancing maturing bonds could be more difficult and expensive.

“You would expect companies, as they sense the economy slowing, to start to prepare themselves to absorb what would likely be an impact to revenue,” said Jim Schaeffer, deputy chief investment officer at Aegon Asset Management in Chicago, which manages $380 billion of assets. “Instead, they’re looking at the incredibly inexpensive cost of debt and taking advantage of that to enhance returns for shareholders.”

Debt levels were growing even before the Federal Reserve started cutting rates in July. The ratio of a key income measure to net debt levels rose to 1.9 times at the end of the second quarter, a record high, according to Morgan Stanley research. The figure was closer to 1.76 times in the same quarter last year. That ratio was hurt by falling earnings and rising debt loads, as well as declining cash levels, Morgan Stanley strategists led by Vishwas Patkar wrote last week.

The growing leverage levels can be seen in individual companies’ results. Tupperware’s total debt has climbed above $1 billion at the end of June from $889 million at the end of 2018, while its sales and earnings have been falling. The shift was enough for S&P Global Ratings to cut the company in August to junk from BBB-, the lowest investment-grade rating.

Investment-grade companies are selling so much debt because investors are eager to gain more yield as the Fed cuts rates. September has been one of the busiest months on record, with corporations having sold more than $150 billion of high-grade bonds. For junkrated companies, the story is in many cases different, as the riskiest of the risky have struggled to borrow.

Overall, blue-chip companies’ debt loads have been rising for most of the past decade, as they’ve financed acquisitions, bought back stock and taken other moves designed to boost earnings per share. The total value of U.S. investmentgrade corporate bonds stands around $5.8 trillion, a record and more than triple the level in October 2008.

Companies’ debt levels may not end up being a huge problem for corporate bonds, according to Dominique Toublan, head of U.S. credit strategy at BNP Paribas. The borrowers at the bottom end of the investment-grade spectrum, those rated in the BBB tier, don’t have much room to borrow more, so debt levels can only rise so much.

“We don’t feel like it’s a big headwind for the market. It’s more like the tailwind is slowing down and it’s okay,” Toublan said.