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Junk Is Now Dominating Corporate Debt Bubble’s Rapid Growth

Sept. 29, 2017 (EIRNS)—The U.S. corporate debt bubble, which exploded from $7 trillion to $14 trillion in debt from 2010-16, is being rapidly blown up in 2017 largely by junk debt, which alone is expanding that bubble by $800 billion in 2017. It is this debt which is again being packaged by Citigroup and other Wall Street banks, with higher-rated debt, into the notorious collateralized debt obligations (CDOs) which have reappeared during this year. With an increasing number of defaults and interest rates now having started to rise from their decade-long slumber, this process is ripe for a 2008-like financial crash.

Junk debt refers to the combination of junk bonds and leveraged loans (loans to already overindebted companies, often used to finance leveraged buyouts). As a Bloomberg piece Sept. 26 by Lisa Abramowitz pointed out, these two types of "high-yield" debt have essentially become indistinguishable now—they are simply "junk debt." The new debt blowing the bubble up is now coming without covenants—i.e., the lenders cannot prevent the same firms from issuing the same junk to one, two, many other lenders at the same time, plunging themselves into unpayable debts in the manner of, say, Jared Kushner’s family real estate company in New York. At the bottom of the cancerous process, is the eight straight years of central bank zero-interest policy associated with money-printing of some $13 trillion and still rising rapidly. Charts with the article show that total "junk debt" creation in 2017 is a third greater than in previous years.

The recent Toys R Us bankruptcy attracted alarm because the market value of the company’s roughly $5 billion in bonds fell much further than expected after the (expected) announcement, down to below 20 cents on the dollar rather than the 40 cents expected by those who had said the bankruptcy was "discounted already."

Overindebted corporations issuing junk debt have come to include the largest. Zero Hedge had the following on ExxonMobil Sept. 20.

"Let’s take a look at ExxonMobil....

"In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money thats available to pay out to shareholders) of $33.8 billion.

"At the time, the company had $6.6 billion in debt.

"Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.

"In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.

"Plus its profits and free cash flow collapsed by more than 80%. And debt more than quadrupled."

Referring to the financial engineering accomplished with all that debt, Zero Hedge notes, "Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher." And it gives several other nearly identical examples, including General Electric.