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Steve Chiotakis: Many, if not most of the smart guys on Wall Street, underestimated the severity of the mortgage crisis. Now some of them are making sure they don’t miss looming problems in other markets. You may have heard about concerns in the commercial real-estate sector. But there’s one that may not be on your radar screen. From New York, Marketplace’s Jeremy Hobson tells us about the corporate debt cliff we still don’t have a parachute for.
Jeremy Hobson: Companies are just like most Americans. When they need to buy something or even pay their people, they break out the credit card.
Steve Miller tracks corporate debt for Standard and Poor’s. He says, just like the rest of us, companies pay more or less interest on their debt depending on how likely they are to pay it back. The really dicey ones go to what’s called the leveraged-loan market.
STEVE MILLER: So like in the mortgage market, you have the prime borrowers who are at the top of the food chain, and then the subprime, that tend to be the riskiest borrowers. That’s where the leveraged-loan market fits in. It’s for the risky-most spectrum of borrowers who are still performing.
Leveraged loans have another, less polite name — junk. And in the boom years, companies loaded up on it.
MILLER: Most of the debt got put in place in 2005 through 2007, and they tend to be seven-year maturities, would come due in 2012 to 2014.
To give you an idea of just how big the bill is going to be, Miller says $10 billion of that junk debt comes due next year. And it gets exponentially worse every year after that.
BRAM SMITH: There’s $1.5-trillion worth of outstanding leveraged loans and leveraged bonds. One and a half trillion. A very big number.
Bram Smith directs the Loan Syndications and Trading Association. He says it’s unlikely all the companies that borrowed that money will be able to pay it back on time.
SMITH: Treasurers and CFOs now, who are focusing on that, are doing what they can to start chiseling away at their own individual amortization, and pushing it forward.
What he means is, they’re looking desperately for ways to delay the loans, extending or refinancing them. Those that can’t do that may not survive.
But before you head for the nearest cliff, S&P’s Steve Miller says we’ve been here before.
MILLER: When the market fell out of bed in 1989 and 1990, there was a similar wall of maturities coming due in the mid-90s. For a while, there was a lot of anxiety around it and people doing transactions to try and push out some of those maturities. But then, when the stock market recovered and the economy got going again, companies found buyers to take properties on and reduce the debt.
And they went looking for cash in the IPO market. They took their companies public. Miller and Smith say IPOs could be a savior this time as well.
In New York, I’m Jeremy Hobson for Marketplace.