That said, the U.S has borne the brunt of the downgrades and China’s slowdown has been mostly felt in the commodities sector, indicating the impact on the global economy may be limited. S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment- grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.
Fragile Economy
“There are hairline cracks but it doesn’t mean it’s going to lead to cataclysmic global conditions in the credit markets,” said Suki Mann, a former head of European credit strategy at UBS Group AG and founder of bond market commentator CreditMarketDaily.com. “Leverage is higher but it’s only a problem if you can’t service your obligation and the ability of investment-grade companies to service obligations is at a very good level.”
At about 3 percent, overall borrowing costs for companies around the world remain below the average of 4.5 in the preceding two decades even as spreads have widened.
Still, for many in the market, the combination of high leverage levels and a sluggish global economy is a big concern. Growth across the world will be dragged down this year as China’s slowdown prolongs the commodity slump and recessions endure in Brazil and Russia, according to the World Bank. It lowered its forecast for 2016 growth this month to 2.9 percent from a 3.3 percent projection in June. In comparison, the world economy advanced 2.4 percent last year, slower than the 2.6 percent expansion in 2014, the bank said.
Companies’ debt costs are reaching new heights. As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysts.
Symptomatic Problem
The cost of raising and servicing capital is outweighing the returns companies get from it, a problem that Citigroup said has affected one third of all companies -- the majority of which posted shortfalls in each of the past three years. The bank compared returns on invested capital with the weighted-average cost of funding among the more than 1,600 companies in the MSCI World Index in bank data going back to 2010.
The emerging cracks “are part of the same symptomatic problem -- an economy that’s got stuck on stimulus,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management, with about 284 billion pounds ($405 billion) of funds under management, according to its website. “It’s not sustainable.”