Corporate Borrowers “Overleveraged” as Rate Hikes Loom


If you are looking for an economic boogeyman, don’t look any further than investment grade corporate credit.

Six years of easy access to government-supplied liquidity has created a problem where corporate finance professionals are least likely to look: large, highly rated corporate borrowers.

“Credit is being rationed into the corporate sector as borrowing costs are being heavily supplanted [by U.S. monetary policy],” said Scott Minerd, chairman of Guggenheim Investments and Global Chief Investment Officer for Guggenheim Partners. “That risk is only increasing as M&A drives more leverage. That makes corporate borrowers the most at risk in the next economic downturn.”

Guggenheim made his remarks at the Standard & Poor’s conference in New York last week.

Minerd argues that although the U.S. government -- through the Federal Reserve Board -- avoided the fallout from the 2008 financial crisis, it also put together “macro prudential policy” that has made investment grade borrowers “more and more levered.”

“Dodd-Frank, Solvency II, the Volcker Rule were meant to save us from ourselves, but they are essentially making credit available to sectors of the economy at extremely attractive rates -- especially to investment grade corporate borrowers -- and cutting off credit to other parts of the economy,” Minerd explained, adding that once interest rates begin rising, corporate borrowers will be squeezed.

“This is a significant risk that is lying out there that the longer this progresses that the potential losses from this risk will mount up over the coming years,” Minerd added.

The Guggenheim investment pro is not the only Wall Street watcher to sound the alarm on corporate debt.

A recent report by Deutsche Bank said the corporate bond market -- which has skyrocketed from $5.4 trillion in 2009 to $7.8 trillion today -- may be ready for a significant correction. “As the Fed prepares the market for the end of the period of zero short-term rates, we may be approaching a reassessment of just how much leverage is appropriate given the overall market compensation,” the report states.