NEW YORK (Reuters) – Many US companies gorging on cheap debt with forgiveness over the last few decades are now off their hooks and spend a lot of their income paying out lenders than investing in their businesses or hire.
FILE PHOTO: A NYPD officer is standing guard at the entrance of the Federal Reserve Bank of New York in Manhattan, New York, USA, December 16, 2017. REUTERS / Eduardo Munoz
Like small businesses, which together account for half of US employment, starting to feel the squeeze, this can have a chilling effect on hiring, wages, and spending, adding headwinds from wobbly financial markets and ebbing global growth, economists and corporate finance professionals say.
The number of companies struggling with their debt obligations fluctuates near record highs. About 17 percent of US listed companies had difficulty making debt payments at the end of last year, up from less than 10 percent in 2010 and from a high of over 20 percent in 2016, according to the Institute of International Finance Inc, a financial institution trading group.
In value values, such companies account for a fraction of companies such as the IIF monitors. However, they exemplify the battles in a larger universe of private firms that have uploaded so-called leveraged debt, typically variable rate loans are offered on fast terms by banks and non-bank lenders.
With Federal Reserve interest rate increases that raise interest rates and the US economy is facing a slowdown as it approaches a downturn, more and more of these loans can encrypt just to stay afloat.
"It can reduce investment, capital utilization and unlock the economy because companies can be so focused on making debt payments that they can't hire," said Christopher Zook, chief investment officer of the CAZ Investments LLC family office.
Take KPI Card Group Inc, which makes credit and debit cards to banks and retailers. The card maker was among the companies that dropped the loan market when it borrowed $ 435 million for general purposes before it was released in 2015.
CPI repaid some of the loan with income from its public offer, but as the profits worsened, the company has almost lost its ability to service the remaining debt. Operating revenues for 2018 largely correspond to their debt expenses, according to Moody's Investors Service, down from nearly five times the size in 2014.
The company reduced its number of employees by 13 percent between 2015 and 2017 to 1,200 employees. Last year, it stopped a factory in Littleton, Colorado, where it is headquartered, according to the State Department of Labor and Employment.
As Americans complete the shift to chip-enabled credit cards, the CPI forecasts will increase revenues in 2019. But the forces that have held it back will continue: The credit card creator loses market share to competitors, and large stocks help big banks keep their prices low, says Stephen Morrison, an analyst at Moody's. CPI cards refused to comment.
Investor's pursuit of higher returns over a period of record long-term interest rates has given debtors access to cheap and easy credit and encourages them to take on more debt than is possible in less forgiving conditions.
As a result, the median level of debt of non-financial corporations in relation to their earnings already exceeds levels before the last financial crisis, according to Standard & Poor's rating agency.
While US policemen ensure that credit conditions remain broadly healthy, the volume of loans delivered, classified as garbage or near garbage, has doubled to record $ 1.4 billion over the past five years.
"The loaned loan market can be considered a canary in the coal mine for the US economy," said Jeremy Swan, chief executive of financial sponsors at the accounting firm CohnReznick LLP.
The drug chain Rite Aid Corp is another example of how the original relief offered by such loans over time became a burden. The Pennsylvania-based company borrowed over $ 1 billion on terms in 2013 to refinance old debt, according to Refinitiv data.
Credit rating agencies welcomed the funding at the time because it would help the chain, but still heavily committed and uneven sales, reduce interest rates.
Nevertheless, the debt burden showed too much in the years to come.
"They couldn't grow because they had so much debt," said Mickey Chadha, senior manager at Moody's Investors Service. "They didn't have the cash flow and the capital to invest in their stores."
Last year, after two unsuccessful attempts to sell around 1,900 stores, the dealer sold to competitor Walgreens Boots Alliance Inc to reduce his influence at a time when the rise of e-commerce has challenged his business.
The number of associated Rite Aid employees slowly reduced to 87,000 from 89,000 as it was working to pay off the debt, according to the company's annual reports. The business figure dropped to 4,536 from 4,623.
After the sale to Walgreens Boot Alliance, Rite Aid had 2,550 stores and 59,000 employees. Its stock trades under $ 1, even though it recently announced plans for a reverse share split.
"Rite Aid has made significant progress in reducing corporate debt and simplifying and strengthening the capital structure over the past few years," said the dealer in a statement.
The company said it recently refinanced, pushed back decay until 2023 and won improved interest rates, and it also has $ 1.9 billion in liquidity, "giving strong flexibility to operating and investing in (their) business. "
Economists say generous loan terms allow highly-raised companies that may otherwise be pushed to bankruptcy to continue, but companies' investment and employment repayments may exacerbate an expected decline and Damaged thin-capitalized non-bank lenders.
"There is a line of error in the ecosystem that threatens the broader economy," says Mark Zandi, chief economist at Moody's Analytics. "I don't know if we are to send the red flare, but the yellow flare. "
Reporting Jessica DiNapoli, Kate Duguid and Joshua Franklin in New York; Editing by Greg Roumeliotis and Tomasz Janowski