COVID-19

With companies on borrowing spree, Federal Reserve expands lending backstops

Justin Ho Apr 9, 2020
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Corporate debt has been attractive to investors over the past decade. Johannes Eisele//AFP via Getty Images
COVID-19

With companies on borrowing spree, Federal Reserve expands lending backstops

Justin Ho Apr 9, 2020
Corporate debt has been attractive to investors over the past decade. Johannes Eisele//AFP via Getty Images
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The Federal Reserve’s rescue program includes support for the corporate debt market. Fed Chair Jerome Powell has mentioned his concern about corporate debt levels in the past. The Fed announced Thursday that it is expanding its support to “backstop” a wider range of business lending.

Corporate debt ranges from safe investment-grade debt to risky high-yield bonds. Chuck Tomes, a portfolio manager at Manulife Investment Management, said any way you slice it, over the last 10 years corporations have been borrowing a lot of money.

“It’s the most that it’s ever been on a historical basis,” Tomes said. All that corporate debt has been attractive to investors, pension funds, insurance companies, mutual funds and exchange-traded funds. And with negative interest rates in Europe and Japan, Tomes said, foreign investors have been looking around for other places to park their money.

“They’re finding it in, in a lot of cases, the U.S. corporate bond market,” he said.

Now that the Fed is widening its support for corporate debt, some companies already have taken to borrowing more, according to Marquette University professor Matteo Arena.

“We’re seeing a lot of companies in the last week going out and issuing large amounts of debt, at very low rates, and for many companies it’s very close to zero percent,” Arena said.

There’s already $5.4 trillion worth of investment-grade corporate debt out there, said Collin Martin, fixed-income strategist for the Schwab Center for Financial Research.

That might sound scary, but he says for stronger sectors, like financial companies, more borrowing can be a positive.

“The fact that corporations can issue this debt to kind of serve as a bridge to get them through [the economic slowdown caused by the pandemic] should be good for the longer-term health for a lot of corporations,” Martin said. The risk, he added, falls on heavily indebted companies in sectors that are getting hammered, such as tourism, energy and department stores.

“Those companies are going to see a significant negative hit to their cash flows,” Martin said. “It’s going to be tough to service those debts.”

The Fed said it plans on purchasing some riskier assets, but Martin says that doesn’t mean the Fed can keep companies out of default.

COVID-19 Economy FAQs

New COVID-19 cases and deaths in the U.S. are on the rise. How are Americans reacting?

Johns Hopkins University reports the seven-day average of new cases hit 68,767 on Sunday  — a record — eclipsing the previous record hit in late July during the second, summer wave of infection. A funny thing is happening with consumers though: Even as COVID-19 cases rise, Americans don’t appear to be shying away from stepping indoors to shop or eat or exercise. Morning Consult asked consumers how comfortable they feel going out to eat, to the shopping mall or on a vacation. And their willingness has been rising. Surveys find consumers’ attitudes vary by age and income, and by political affiliation, said Chris Jackson, who heads up polling at Ipsos.

How many people are flying? Has traveled picked up?

Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.

How are Americans feeling about their finances?

Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.

Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.

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