A20 eZ re the washington post.wednesday, march 11 , 2020
the coronavirus outbreak
BY DAVID J. LYNCHThe coronavirus panic could
threaten a $10 trillion mountain
of corporate debt, unleashing a
cycle of layoffs and business
spending cuts that would hit the
economy j ust as some analysts a re
warning of a recession.
financial markets already are
showing signs of major stress. In-
vestors are demanding higher in-
terest payments i n return for l end-
ing to less creditworthy compa-
nies; some businesses are delaying
their planned bond sales while
they wait for Wall Street to settle
down; and ratings agencies are
moving toward downgrading the
shakiest corporate borrowers.
The mammoth debt bulge in-
cludes a significant increase in
borrowing by firms with the low-
est-quality investment grade —
those rated just one level above
“junk.” more than $1 trillion in
“leveraged loans,” a type of risky
bank lending to debt-laden com-
panies, is a second potential flash
point.
Watchdogs including the fed-
eral reserve have warned f or years
that excessive borrowing by cor-
porations, including some with
subpar credit ratings, might even-
tually blow a hole i n the U.S. econ-
omy. Now, as Wall Street wrestles
with a global epidemic, the debt
alarms show how investors are
reassessing risks they overlooked
during the long economic expan-
sion.
“It is a big concern,” s aid ruchir
Sharma, chief global strategist for
morgan Stanley. “We’re dealing
with the unknown. But given the
enormous increase in leverage,
the system is fragile and vulnera-
ble.”
Energy companies that have
borrowed heavily in recent years
may be the first to suffer, as a result
of the oil price war between Saudi
Arabia and r ussia. falling oil p ric-
es, while good news for consum-
ers, may reach levels that will
make it impossible for companies
in the U.S. shale industry to cover
their costs.
on monday, investors battered
some energy companies that have
big outstanding obligations.
Shares of Halliburton, which has
more than doubled i ts total debt t o
$11.5 billion since 2012 despite
sliding revenue and earnings, lost
38 percent of their value.
The oil field services company
last week raised $1 billion by sell-
ing investors 10-year bonds pay-
ing interest of 2.9 percent. Halli-
burton said it plans to use the
proceeds to pay off existing debt.
over the next six years, it faces
$3.8 billion i n debt payments.
To day’s debt woes originated in
the months that followed the Sep-
tember 2008 Lehman Brothers
collapse.
In response, the federal re-
serve cut its benchmark lending
rate to zero and kept it at or near
historic lows for a decade. The aim
was to heal a wounded economy,
but the era of easy money bred
excesses that o nly n ow are coming
into view.
Access t o low-cost c redit h elped
many companies grow and hire.
But it also enabled some that
weren’t profitable to survive by
repeatedly refinancing their debt.
These “zombie” firms, which do
not earn enough to cover their
interest payments, account for 1 i n
6 publicly traded U.S. companies,
Sharma said.
About half of the total debt of
nonfinancial companies is rated
“BBB,” just slightly better than
junk or high-yield debt. Compa-
nies such as eBay and martin mar-ietta have sold bonds this month
to investors w ith such ratings.
Using a broad measure of busi-
ness liabilities, the ratio of debt to
assets is at its highest in 20 years,
according to the fed. one poten-
tial trouble spot lies in the rapid
growth o f “leveraged l oans,” m ade
by top banks such as Goldman
Sachs and JPmorgan Chase to
scores of cash-short companies.
Until recently, such loans typi-
cally w ere made to companies that
were not already deeply in debt.
But in the past two years, the
biggest borrowers were the na-
tion’s most indebted companies,
according to the federal reserve.In the first half of last year, about
40 percent of leveraged loans went
to companies with a debt-to-earn-
ings ratio o f 6 to 1 or greater.
Businesses have been able to
bear their extraordinary d ebt b ur-
den only because borrowing costs
have been historically low. If that
changes for any reason, cash-
strapped companies probably
would resort to layoffs and slash
their spending on new factories
and equipment to conserve mon-
ey f or interest payments.
The danger now is that the
economy’s sudden stop — with
conferences and other public
events canceled, travel discour-
aged and consumers staying home
— will cut revenue for many com-
panies and make it harder for
them to repay t heir creditors.
Even before the full effects of
the coronavirus hit the UnitedStates, analysts were cutting their
earnings forecasts. As of feb. 28,
more than twice as many compa-
nies in the Standard & Poor’s 500-
stock index had issued negative
guidance on their first-quarter
earnings as had issued upbeat as-
sessments, according to factSet, a
financial data company.
At the same time, nervous in-
vestors are becoming pickier
about which borrowers they fund,
cutting off the flow of cheap mon-
ey t o firms t hat need it to stay a live.
“It’s a pandemic of fear that’s
spreading faster than the virus,”
said Ed Yardeni, the eponymous
head of a research company.In recent days, signs of bond
market stress have been multiply-
ing. After years of barely distin-
guishing between good credit
risks and bad, investors are grow-
ing more discerning.
The “spread,” or additional
yield, that investors demand to
hold junk bonds compared with
risk-free U.S. Treasurys has in-
creased by more than two percent-
age points since mid-february —
about four times the increase in-
vestors required from more cred-
itworthy borrowers, according to
Bloomberg Barclays data.
fearing the higher interest
charges — and hoping for addi-
tional fed rate cuts — some corpo-
rate borrowers have delayed issu-
ing debt.
New corporate bond issues
were falling even before the coro-
navirus upset Wall Street over thepast few weeks. In January, U.S.
corporations sold $63.4 billion
worth of bonds to investors, down
more than 10 percent from the
same period one year earlier, ac-
cording to the federal reserve.
“Corporate bond issuance has
petered out quite a bit,” s aid Kathy
Bostjancic, a U.S. financial m arket
economist at oxford Economics.
“There were a few days last week
we didn’t h ave any.... T here’s j ust
so much fear.”
ratings agencies, including
S&P Global ratings, also are scru-
tinizing corporate borrowers for
evidence of weakness. on mon-
day, S&P Global placed ryman
Hospitality Properties, which
owns hotels and resorts including
the Gaylord opryland, on a nega-
tive watch, citing “significant cor-
onavirus-related c ancellations.”
If the economic outlook dark-
ens quickly, a large number of
borrowers might become “fallen
angels,” downgraded from the
lowest investment grade into the
speculative junk market. Along
with higher borrowing costs,
some of them might struggle to
find creditors because many pen-
sion plans, insurers and mutual
funds are permitted to buy only
investment-grade s ecurities.
“We’ve had so many years of
cheap and easy money with little
differentiation in credit quality,”
said Sonja G ibbs, m anaging direc-
tor with the Institute of Interna-
tional finance. “What happens if
you s tart seeing downgrades?”
The current bond market tur-
moil is not a s severe as that experi-
enced during some previous re-
cessions, Sharma said. overall fi-
nancial conditions are about as
tight as they were during the 2011
European debt and currency cri-
sis, although not as bad as during
the global financial crisis, accord-ing to Deutsche Bank Securities.
“The likelihood that we’ll have a
full-blown liquidity crisis is pretty
limited,” said michael Stritch,
chief investment officer for Bmo
Wealth management. “The bank-
ing sector is much less leveraged
than in the past, so t hat’s a positive
in terms o f credit availability.”
Still, with investors expecting
the fed to return its key lending
rate to zero in the next few
months, some fed officials are
calling f or the c entral bank to take
additional extraordinary action.
Eric rosengren, president of the
federal reserve Bank of Boston,
said on march 6 that the fed
should consider b uying assets oth-
er than government securities to
buttress the e conomy.
rosengren didn’t offer any spe-
cifics but acknowledged that Con-
gress would need t o authorize any
fed purchase of stocks or corpo-
rate bonds.
Corporate debt excesses are not
limited to the United States. Cor-
porate zombies also roam the Eu-
ropean Union and Japan, where
borrowing costs have been low for
years and are now negative. In a
2018 study of 14 advanced econo-
mies, the Bank of International
Settlements s aid t he share o f zom-
bie firms had risen from 2 percent
in the 1980s t o 12 p ercent in 2 016.
The International monetary
fund and the fed have warned
about reckless corporate borrow-
ing for several years. In a global
downturn that was half as severe
as the 2009 crisis, corporations in
eight major economies, including
China, Japan and the United
States, may be unable to repay
$19 t rillion worth o f debt — nearly
40 percent of the global total, ac-
cording to the Imf’s most recent
global financial stability r eport.
[email protected]Virus raises new fears over risky corporate borrowing
“Corporate bond issuance has petered out
quite a bit.... There’s just so much fear.”
Kathy Bostjancic, U.s. financial economist at oxford economicsthe president also floated the idea
of allowing Americans to delay
filing their tax returns in April,
reimbursing people or companies
for sick leave and providing aid to
the travel i ndustry. B ut there were
not precise plans on how any of
these things w ould work.
The scramble for policy o ptions
is an attempt to address the coro-
navirus’s economic fallout, which
— in Trump’s public statements —
has become as high a priority as
dealing with the virus’s spread.
Hints of policy progress sent the
Dow Jones industrial average
markedly higher Tuesday, as it
climbed 1,167 p oints, or close to 5
percent, regaining some of its
steep losses f rom the day before.
In addition to large tax cuts,
Trump talked with republican
senators about what steps they
could take to extend emergency
aid to U. S. oil and gas companies
hurt by the drop in oil prices. He i s
also seeking to help airlines, cruise
companies and hotels, though he
has not said how he would do that
or pay for it.
The policy c hanges could have a
giant price tag, and it’s unclear
what impact they would have on
falling stock prices. The payroll-
tax c ut alone could reduce taxes by
around $400 billion through the
end of the year. White House offi-
cials would not say whether they
had any plans to offset those loss-
es, which would cause the budget
deficit to grow by about 40 per-
cent.
Democrats, meanwhile, are
crafting their own proposals,
which they say would more
squarely a ddress p roblems caused
by coronavirus. They are working
on a plan to offer e xpanded unem-
ployment insurance for affected
workers and f ree coronavirus tests
in legislation they hope can be
completed by t he end of this w eek.
The disunity left it uncertain
how or whether Congress and the
administration will be able to
come together on any economic
proposal to help boost consumer
and investor confidence. A num-
ber of economists believe fallout
from the outbreak could drive the
world economy i nto a recession.
Several major airlines have
moved to slash routes, redraw
their financial outlooks and even
slash executive pay. Delta Air
Lines said Tuesday it was cutting
international flights by as much a s
25 percent and domestic r outes b y
10 to 15 percent. Airline company
stocks have tanked in the past
month as many Americans have
payroll tax from a
Economic
initiatives
could carry
a huge tab
lic assistance programs as well as
allowing for more sick and family
leave.
“one thing is clear. The Ameri-
can people are the ones who will
need the relief if Congress acts —
not the millionaires, not the bil-
lionaires, not the multinational
corporations,” said rep. Hakeem
Jeffries (D-N.Y.). “We need to put
families first.”
Action in the House this week
on a major economic package
would require unusual speed, and
Pelosi had suggested monday
night that a vote this week might
not be p ossible, d epending on how
long it takes to draft text of the
legislation a nd d etermine i ts c ost.
That timeline prompted an
irate response f rom Trump.
“Nancy Pelosi just said, ‘I don’t
know if w e can be ready this week.’
In other words, it’s off to vacation
for the Do Nothing Democrats.
That’s been the story with them
for 1 1 / 2 years!” Trump wrote on
Twitter before traveling to Capitol
Hill.
[email protected]
josh [email protected]
[email protected]
[email protected]Mike debonis, Jeff stein and Paul
Kane contributed to this report.are most impacted by this and
small- and medium-sized busi-
nesses t hat are impacted.”
of all the ideas Trump floated,
the payroll tax-cut plan seemed to
receive the most lukewarm recep-
tion. A payroll-tax cut would do
little, for example, for people who
have lost their jobs because of the
economic fallout of the outbreak.
And it would deliver benefits for
people who are in fields or parts of
the country that have not been
affected by the virus at a ll.
“Different people have a differ-
ent idea about what would really
make a difference,” s aid Sen. John
Thune (S.D.), the No. 2 Senate
republican. “right now more
than anything e lse, y ou w ant to try
to lessen or minimize as much as
possible the a dverse e conomic i m-
pact caused by the virus. And the
key is what are the best levers,
really the b est tools to do that?”
To p House Democrats, mean-
while, said Tuesday they planned
to move as soon as this week on a
relief package that narrowly tar-
geted individuals and families af-
fected by the coronavirus out-
break.
The measures floated by Pelosi
and other leaders included an ex-
pansion of unemployment insur-
ance, food stamps and other pub-making clear to allies in recent
days that he “detests” pursuing
this particular policy, which prob-
ably would add to federal debt and
deficits, according to two veteran
republicans briefed o n the discus-
sions who were not authorized to
speak p ublicly.
After the meeting, mcConnell
told reporters that he had faith in
Treasury Secretary Steven
mnuchin coming up with a deal
with Pelosi on some kind of eco-
nomic package, as the two have
had recent success in negotiating
bipartisan budget deals.
“We’re hoping that he and the
speaker can pull this together so
that we end up not playing parti-
san games, at a time which seems
to me to cry out for bipartisan,
bicameral agreement. T hat’s what
I’m hoping to see, and hoping to
see pretty soon,” mcConnell said,
without endorsing or even men-
tioning t he payroll-tax cut.
During the meeting with GoP
senators, mnuchin emphasized
th at Congress needed to act to
help the airline industry in partic-
ular. He then went to meet with
Pelosi, emerging to say, “We’re go-
ing to work together on a biparti-
san basis to figure out how we can
get things done quickly that are
going to help the Americans thatpitched a payroll-tax cut that
could cost hundreds of billions of
dollars.
Sen. Lamar Alexander (r-
Te nn.) suggested that any payroll-
tax cut should be reserved until
the situation grew more dire. But
Trump said he wants to do it now,
and that if it were up to him it
would b e permanent, according to
people with knowledge of what
transpired.
Payroll taxes are a combination
of taxes paid by employers and
employees that fund Social Securi-
ty and medicare. In the past, pay-
roll-tax cuts have targeted the
12.4 percent tax that finances So-
cial Security, w ith 6.2 percent paid
by employers and 6.2 contributed
by employees. President Barack
obama cut the employee portion
to 4.2 percent for two years. Some
senators interpreted Trump’s re-
marks Tuesday as a desire to cut
the taxes completely, and perma-
nently.
A payroll-tax cut has little to no
chance of advancing in the Demo-
cratic-controlled House, where
Speaker Nancy Pelosi (D-Calif.)
and h er top lieutenants have s pent
the p ast day pouring c old water o n
it. Senate majority Leader mitch
mcConnell (r-Ky.) also views the
idea with skepticism, privatelyeither canceled travel plans or re-
fused to book new flights. Ameri-
can Airlines’ stock price has fallen
almost 50 p ercent since feb. 12.
A huge contraction in travel
and entertainment spending, in
part because p eople and business-
es are wary about putting their
health at r isk, could have s pillover
effects on a range of other busi-
nesses, particularly social venues
like restaurants.
Lawmakers in both chambers
were uncertain about t he path f or-
ward.
In t he p ast two days, Trump h as
taken on a more somber tone in
talking a bout the economic fallout
caused by t he virus.
“Everybody has to be vigilant
and has to be careful. But be calm,
it’s really working out and lot of
good things are going to happen,”
Trump said. “The consumer is so
powerful in our country with what
we’ve done w ith tax cuts a nd r egu-
lation cuts and all of those things,
the consumer has never been in a
better position than they are right
now.”
But inside the Senate GoP
lunch, according to lawmakers
and aides present who spoke on
the condition of anonymity to dis-
cuss the private gathering, Trump
faced some skepticism as heJabin botsford/the Washington Post
president trump and Vice president pence meet with health insurance industry executives at the White House on tuesday during a briefing about the spread of coronavirus.
Democrats and republicans reacted negatively to trump’s proposal to cut payroll taxes in response, but paid sick leave for employees could be an area of consensus.