Demand for corporate debt is likely to hit a record USD 62 trillion by 2020, but lenders may get cautious amid a volatile global environment leading to lack of credit, or “Crexit”, says a report. As per S&P Global Ratings, despite an “inevitable credit correction” global corporate borrowing demand would reach USD 62 trillion by 2020, fuelled by expansive monetary policy. However, it said a “heightened sensitivity to unexpected developments similar to UK’s referendum to leave the European Union could lead to a crisis of confidence and rapid departure of both lenders and lower-quality borrowers from the debt markets…this scenario can be described as a ‘Crexit'”.
The report’s co-author Paul Watters said, “The challenge for monetary authorities is in preventing this possible financial market volatility from infecting the real economy, given that their existing tools are reaching the limit of effectiveness”. The report also noted that nearly half of corporate debt issuers are highly leveraged, suggesting that a correction in global credit markets is “unavoidable”. “In fact, analysts believe that the credit correction began in late 2015 and will likely stretch through the next few years as defaults spike,” the report added. The report has estimated the total outstanding corporate debt, including new issuance and refinancing, to expand to USD 75 trillion over the next five years.
Country-wise, China’s share of global corporate debt would rise to 43 per cent in 2020 from 35 per cent last year.
US debt could slightly dip to 22 per cent from 24 per cent, while Europe’s (Eurozone and UK) share would ease to 16 per cent from 20 per cent, S&P Global noted. “Brazil has had the fastest growth in leverage (as cash flow declined) and we categorise its average funds from operations to debt ratio as aggressive,” the report said. “The next fastest are Singapore, Australia, China, Mexico and Hong Kong, which are generally trade-dependent, commodity-reliant, or China-related countries,” it added.