Credit rating agency S&P warns of high debt for companies

Credit rating agency S&P Warns In a new report, companies with high debts could be in trouble as soon as interest rates rise and banks turn off the credit tap. Years of extremely low interest rates and lenient credit conditions have allowed companies to get into debt very cheaply, making them much more vulnerable in 2018 to a scenario in which interest rates rise again.

The rating agency analysed the figures of 13,000 different companies and estimated that the percentage of companies with high debt, defined as a debt-to-earnings ratio from more than five, has increased from 32% in 2007 to 37% in 2017. Across the board, companies have more debt on their balance sheets than before the crisis, as S&P calculated that the level of corporate debt increased from 81 to 96 percent of GDP between 2011 and 2017.

Good operating results mask debt position

According to the credit rating agency, the fact that there are fewer and fewer bankruptcies despite the increasing debts can be explained by the recovery of the economy, which has led to an increase in corporate profits. It is expected that American companies will benefit from Trump's tax cuts in the near future, but this only masks the fundamental vulnerability of the way companies finance themselves for a longer period of time.

"If the debts are so big and the number of defaults is so low, then there must be something going on somewhere. A normalisation of market interest rates could affect [companies'] creditworthiness', analyst Terry Chan concluded. In recent years, companies have been able to finance themselves cheaply with debt capital, but if interest rates start to rise again, this will have a direct negative impact on the profitability of companies. That's definitely a risk factor to consider.