US corporate debt excluding financials has risen to levels of GDP previously associated with US recessions, while a number of key leverage ratios paint a similarly negative picture. But how serious is the problem, if it is even a problem at all? The 300% rise in outstanding Investment Grade BBB debt over the past decade warrants close attention. But in our view, the bigger threat lies in US leveraged loans, where the value of debt to increasingly poor quality borrowers has soared while lender protections have diminished.
This quarter's Investment Insights looks in more detail at US corporate balance sheets to assess the potential risks to the broader US economy from high levels of company borrowing should corporate funding costs rise further and income fall as the US cycle matures. In particular, we seek to understand if recent investor concerns are merited or mispriced in the context of prospects for US economic growth and the outlook for global asset classes. In short, does corporate America have a debt problem or not?