![]() ![]() Leveraged loans to these companies are funded primarily by non-bank institutional investors, with the majority of cash raised by the issuers of collateralized loan obligations (CLOs). Let’s start with the financing challenges facing larger companies. In the current environment, however, leveraged firms will struggle to obtain financing from their existing loan creditors, for a variety of reasons. Typically, when companies are running out of cash and need a loan, they turn first to their current lenders, who with their privileged access to company-specific information, are best placed to make a decision quickly. In December, before the virus emerged as a serious economic threat, the Financial Stability Board (FSB) issued a warning regarding the vulnerability of the leveraged loan markets to sudden economic shocks. For the past several years, these factors have raised red flags for economists, global leaders and regulatory bodies. Borrowers have been able to artificially inflate their earnings for loan tests using liberal “ EBITDA addbacks.” As a result, many weaker highly leveraged firms have been able borrow more without restructuring their balance sheets than they would otherwise have been able to. A decade of robust debt markets came hand-in-hand with looser creditor governance terms and weaker covenants. The riskiness of this $6 trillion in debt has increased since the last downturn. Of this, we estimate that almost $6 trillion sits on the balance sheets of companies that are highly leveraged. This is up 15% from 2008 and represents 93% of global GDP. Global debt on non-financial corporations stood at $71 trillion by the end of 2018, according to S&P, a rating agency. Unfortunately, the global corporate sector went into the pandemic with unprecedented levels of financial leverage, largely because the low-interest environment following the 2008 financial crisis made it easy for companies to borrow. With the economic impact of the pandemic likely to last into the fourth quarter of this year, it is very likely that companies will have to look beyond their bank credit lines for additional liquidity. So how are borrowers positioned right now? Corporate Balance Sheets Are Already Highly Leveraged If you can’t fund ongoing obligations out of the money you have coming in, you are going to have to get another form of financing or file for bankruptcy. ![]() ![]() According to JPMorgan, as of the end of March, nearly $208 billion ( 77% of the funds available in the facilities) had been borrowed by large companies through revolver drawdowns, of which borrowings by below investment grade firms accounted for about half.īut will revolving lines be enough to bridge companies through the crisis? Revolvers are used to bridge temporary cash shortfalls - and once the limit of the line is reached, no more cash is available, unless the lenders agree. So far, a relatively robust financial system has been able to provide short-term funding, primarily through the revolving lines of bank credit available to most firms. The coronavirus pandemic has left the corporate sector scrambling for cash. To get all of HBR’s content delivered to your inbox, sign up for the Daily Alert newsletter. In these difficult times, we’ve made a number of our coronavirus articles free for all readers.
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