In a recent report by McKinsey & Company, statistics citing increased bond issuance over the last decade paint a rough sketch for what potentially lies ahead. Since 2007 total global debt increased by 75% from $97 trillion to $169 trillion by the end of 2017. In that same decade due in part to restraints on conventional commercial bank lending, corporate bond issuance increased 2.5 times.
While debt is a function of a healthy economy, what is concerning is that there has been a decline in quality with almost 40% of non-financial corporate bonds being rated BBB. Also, speculative bond issuance has increased nearly 4 times to $1.9 trillion in 2017, and bond issuance in developing countries with foreign currencies have fueled much of the growth. What is also concerning is that if the current issuance trend continues, over the next five years roughly $3 trillion in US bonds alone will mature. Although corporate profits have been strong for handling debt service, in a rising interest rate environment refinancing could prove difficult.
For banks and financial institutions to position themselves for potential turbulence, it is prudent to place focus on servicing their current loan portfolio and when necessary, "righting the ship" of current borrowers in or near distress. As new loan issuance inevitably begins to taper, rates rise, and the market adjusts, ensuring the current portfolio operates at maximum efficiency will support stability.
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