Ever since the 2008 global financial crisis, companies all over the world have been enjoying debts as a means of their recovery. But now as the coronavirus pandemic threatens to push global economy into recession – many of those debts could be coming near to be repaid. That is expected to increase the impact on the economy and adding another damper to a possible financial meltdown of the global markets.
According to the Institute of International Finance, at the end of 2019, $75 trillion was the total corporate debt excluding banks compared to just $48 trillion at the end of 2009. This is because companies have been taking advantage of ultra low rate debts to issue bonds for fueling the growth of companies.
But for companies particularly in the energy, hospitality and auto sectors, there is a growing concerns that they would not be able to make their bond payments because of the economic impact of the coronavirus pandemic which has collapsed the global travel and tourism industry, shutting down factories across the world, and upending global supply chains. An additional factor is a plunge in global oil prices. That in turn could result in a numerous companies being downgraded and further destabilizing of the financial markets because of the defaults and exacerbate the economic shock.
“This certainly is another match being lit [near] the bonfire of corporate debt liabilities,” said Simon MacAdam, global economist at Capital Economics. “There’s definitely potential for systemic risk.”
Companies now are pinning their hopes on stable energy prices and tourism to generate revenues. Tough times for business could force them to skip servicing their debts which leads to defaults. Te down grading of some of the companies by ratings agencies could also force some bondholders to sell.
“Default and downgrade risks have increased to their highest levels since the start of the current business cycle,” Lotfi Karoui, chief credit strategist at Goldman Sachs, told clients this week.
One of the major sectors that is at risk is the energy sector in where in companies had resorted to debt funds to finance expansion projects in recent years. But currently, the companies are under severe pressure because of plummeting oil prices that have fallen by 50 per cent since early January this year because of slowing demand for oil and the fall breakup in the partnership between major energy producers Saudi Arabia and Russia who had been working together to reduce oil production to prop up global prices of crude.
“Oil producers who were depending on the higher prices to pay back their loans so they could drill for oil are under a significant amount of stress,” said Andy Lipow, president of Lipow Oil Associates, a consultancy based in Houston.
Also in trouble are airlines, hotels and cruise lines as the coronavirus outbreak spread forces more countries t o impose travel bans and quarantine large cities and regions such as in China and Italy. The airline industry was severely jolted after the United States president Donald Trump announced entry of all people from Europe into the US on Wednesday.
“Coronavirus’ rapidly increasing effect on air travel is placing downward pressure on global airline credit profiles, especially as there are risks that demand takes materially longer than previous shocks to recover,” Fitch Ratings said Thursday. It is monitoring American Airlines (AAL), which has a significant amount of debt, as well as Alaska Air (ALK), which is based in Seattle, the site of a significant outbreak in the United States.
Many of the established and global auto companies have been under pressure since the closure of factories manufacturing parts and assembly plants in China since January because of the coronavirus breakout there. However as the virus has spread to more than 100 countries of the world outside of China, there are more threats of closures across Europe and in the United States. The global auto industry is already struggling with slowdown in growth for the third year.
(Adapted from CNN.com)