U.S. corporate borrowers are as vulnerable to downgrades and defaults now as they were in the runup to the global financial crisis as companies continue to borrow at a historic pace amid a debt binge, S&P Global Ratings said in a report.
S&P said leverage among U.S. non-financial corporate borrowers was at a historic high as of Sept. 1, adding that the median debt level among rated corporate borrowers now exceeds the level immediately prior to the financial crisis.
"We believe the risks of this debt binge are significant, given that excessive leverage can bring down a company as fast as prudent borrowing built it up," the rating agency said.
S&P said leverage is rising faster in some segments than in the overall market, particularly in industries sensitive to commodity pricing pressures such as oil and gas, and metals and mining. Defaults have increased in the retail sector due to shifting purchasing preferences and ongoing disruptive pressures. The technology and healthcare sectors have also seen a material increase in leverage.
Companies have been able to pursue debt-financed M&A due to the low cost of borrowing as they struggle to add revenues amid sluggish global GDP growth. Further, many non-financial corporates have taken additional debt to fund shareholder-friendly activities such as buybacks and dividends. Debt issuance has continued to increase throughout the year, rising 3% in the first half compared with the first half of the prior year, according to the report.
"Organic growth prospects, however, continue to lag the increase in debt, pushing leverage past historic norms and raising the likelihood that we are potentially at the peak of the credit cycle," S&P said.
The increased leverage limits the financial flexibility of companies, particularly in downside scenarios, the rating agency said, adding that external conditions such as China's rebalancing, Brexit, and the Federal Reserve's normalization of interest rates can rapidly lead to a deterioration in credit situations.
S&P said higher-rated borrowers should be able to withstand a rapid recalibration in benchmark interest rates, but speculative-grade borrowers are not well-positioned as they have reached peak leverage ratios.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.