U.S. Installment Loans Businesses Vulnerable To Economic Downturn
With companies taking out installment loans for financing, debt has become a big enough problem. Businesses in the U.S. have so much debt that they’re vulnerable to downgrades and defaults – similar to what was seen before the 2008 financial crisis. That’s the word from an S&P Global Ratings report.
U.S. corporate leverage, which does not include financial firms, is at peak level in 10 years. According to David Tesher and Jacob Crooks, two S&P analysts, there are two reasons for this: a slowdown in profits and low-interest rates. This has caused a record leverage ratios among 2,200 corporations.
The most at risk are junk-rated firms because their credit cycle may have crested and future interest rate tightening could occur, which would shut down the possibility of new installment loans borrowings when companies need to have their debt refinanced.
Tesher said this level of leverage means a number of more peripheral stressed sectors will have some challenge to attain new financing along with refinancing. He said it’s not a matter of if it’ll happen, but when it’s going to happen.
Bondholders looking for yield are more willing to agree to less return and weaker protections than previously, which leaves them vulnerable to losses when the market does take a downturn.
The reason companies have taken the debt on is to fund mergers – buy revenue streams. Cheap debt allows firms to carry out some huge debt-financed acquisitions.
Tesher said the challenge has been organic revenue growth through the recovery. He said other revenue-increasing moves such as cost-cutting have been drained. Many installment loans companies are going with strategic M&A to increase their revenue growth.