Moody’s Analytics’ chief economist Mark Zandi is sounding the alarm over a surge in corporate debt among a concentrated group of U.S. corporations, MarketWatch reported on Monday (Aug. 27).
Zandi suggests that the debt burden mirrors the subprime lending spike, which eventually led to the 2008 economic crisis and breakdown of the nation’s financial services market.
“It is much too early to conclude that non-financial businesses will end the current cycle in the way subprime mortgage borrowers did the previous one,” Zandi said. “Even so, while there are significant differences between leveraged lending and subprime mortgage lending, the similarities are eerie.”
The continuing expansion of leveraged loans may derail the nation’s current economic growth. While analysts and corporates alike remain optimistic, Zandi said that the leveraged loan market is one area in which concerns are not overstated.
Recent increases in federal interest rates mean investors should be watching corporate borrowers carefully. According to reports, the Federal Reserve’s “tightened monetary policy” created a boom in demand for loans issued by non-investment grade companies. Today, the leveraged loan market is now worth an estimated $1.4 trillion — more than the junk bond market. Altogether, businesses stand with approximately $2.7 trillion in debt.
Zandi notes that the subprime mortgage market, at the root of the 2008 economic crisis, was worth $3 trillion at its height.
The Fed’s eventual relaxation of underwriting requirements, coupled with the more lenient regulations faced by private equity firms and other leveraged loan issuers, have analysts like Zandi even more concerned — and according to MarketWatch, he’s not the only one. Janney Montgomery Scott’s bond fund manager Guy LeBas also recently raised concerns over the similarities of the leveraged loan market and the rise of mutual funds on subprime mortgages ahead of the housing market collapse.
Still, Zandi noted that, so far, U.S. corporates have not overburdened themselves with debt, and heightened borrowing is a natural response to economic growth.