IMF Issues Warning Over Corporate Debt, Cash Stockpiles

The International Monetary Fund (IMF) released its Global Financial Stability Report last week, pointing to rising corporate debt in the U.S. and the growing stockpiles of cash upon which enterprises are sitting.

Reports in the Financial Times on Friday (April 12) said a combination of tax cuts and low interest rates has the U.S. corporate sector clamoring to expand debt. While the IMF said this trend has resulted in higher shareholder payouts and buybacks, it also warned that high levels of corporate debt and limited regulation could spell trouble in the event of an economic downturn.

“We are particularly worried about the corporate sector, where leverage is rising, underwriting standards and some pockets of the corporate sector are deteriorating,” said IMF Director of Monetary and Capital Markets Tobias Adrian in an interview with CNBC, separate reports Friday said.

By the end of 2018, non-financial corporate debt to GDP was 73 percent, close to levels seen just prior to the global financial crisis. In emerging markets, rising corporate debt is also a concern, the IMF noted, as borrowing conditions are easing.

Similar fears have been raised about China’s corporate debt levels, too.

Financial Times reports noted that corporates’ cash piles are fueling merger and acquisition deals, though capital expenditure has “flatlined” since 2012.

“Strong profits in the United States were used for payouts and other financial risk taking,” the IMF noted, adding that it seems to have made little impact on corporate investment.

Meanwhile, a separate report from Global Credit Data found that long-term loan recovery rates for larger enterprises around the world are significantly higher than analysts had previously estimated. Researchers found lenders were able to recover 76 percent of debts owed by corporates with annual turnover above $56.5 million after default.

Previous estimates by the Basel Committee on Banking Supervision pegged recovery rates at 55 percent, reports in Global Banking and Finance said.