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December 31, 2019 | Leaping Finance Costs are Canary in Coal Mine for Highly Indebted Corporate Sector

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

Over the past 21 months, selling in ‘junk’ grade CCC corporate bonds has pushed their prices down and average yield up from 7.7% in February 2018 to 11.31% by November 2019—a massive 46% increase in borrowing costs for highly indebted companies. Over the same period, the yields on BB bonds rose 11% and BBBs an even greater 18% (from 1.16 to 1.43%), as solvency comes under greater scrutiny.

Newell Brands (Elmer’s Glue and Rubber Maid), Ford, Amazon, 3M, Walmart, GM, GE and Kraft are just a few of the widely held S&P 500 companies teetering on the brink of a debt downgrade in 2020. The trifecta of high debt, rising borrowing costs and slowing sales will continue to focus management on layoffs and other cost-cutting efforts.

Recently, credit-rating agencies (paid by the issuers they are rating) belatedly started warning that “weakest link” S&P 500 companies (with a credit rating below BB with a negative outlook) “jumped to 263 in September, from 243 in August, marking the highest level since November 2009…”.  We cover these issues in our December 31 client letter.  Economist David Rosenberg explains further in the clip below.

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, discusses corporate credit risks with Bloomberg’s Amanda Lang and Shery Ahn on “Bloomberg Markets.”  Here is a direct video link.

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December 31st, 2019

Posted In: Juggling Dynamite

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