Global Corporate Debt Demand Declines To $57 Trillion As Credit Risk Concentrates In China, U.S.

Jul 16, 2015, 12:26 ET from Standard & Poor's

MELBOURNE, Australia, July 16, 2015 /PRNewswire/ -- Global corporate debt demand will peak at an estimated $57 trillion by 2019, a decline of 4% from last year's projection, according to an annual forecast of corporate borrowing needs published today by Standard & Poor's Ratings Services. The prospects of rising defaults in what is now the world's biggest corporate debt market—China—and the surge in leveraged finance in the U.S. pose the most significant risks to corporate credit around the world, according to the report.

The commentary, titled "Global Corporate Credit: Twin Debt Booms Pose Risks As Companies Seek US$57 Trillion Through 2019", estimates that waning commodity prices and global GDP growth will result in a medium-term slowdown in corporate credit growth. Analysts assessed the different stages of the credit growth cycle on national and regional levels, and also evaluated the credit quality of 6,238 global companies.

While the national and regional analyses revealed areas of high concern in Chinese real estate and default risk, the company analysis underscored the growing vulnerability of corporate credit in China and Latin America. North American corporate credit expanded at an intermediate pace, while financial risk metrics for companies in Europe and other Asia-Pacific economies were stable.

"The Chinese credit growth rate still remains faster than most, but the corresponding risks are rising as well," said Jayan Dhru, Global Head of Corporate Ratings and Infrastructure at Standard & Poor's. "We expect Chinese corporations to continue their market dominance by issuing the lion's share of global corporate debt over the next five years."

"However, the rapid growth in debt, the opaque nature of its markets, high debt-to-GDP, and potential moral hazard created by state support all point to relatively high credit risks in China," added Mr. Dhru. "In the U.S., the growth of the leveraged finance segment also suggests increased risks. The seeds of tomorrow's debt crisis may already have been sown in these two regions."

While the total amount of outstanding corporate debt, including existing, refunded, and new debt, is expected to swell to $71 trillion by 2019, overall global credit risk is expected to be moderate. Analysts expect $37 trillion of demand to come from refinancing requests, along with $20 trillion in new issuance. 

The report calculates both refinancing needs and new debt growth by multiplying existing debt and a weighted estimate of global GDP growth. Standard & Poor's forecasts a global nominal compound GDP growth rate of 5.6% per year annually through 2019, down from last year's forecast of 6.1%.

On a regional basis, analysts conclude that Latin America continues to suffer from the downturn in commodity prices, restraining debt growth in that market. The Asia-Pacific region should experience faster corporate debt growth in Hong Kong, Singapore, Indonesia and especially India, which may more than double its total outstanding corporate debt to $2.3 trillion over the next five years. Debt demand in the eurozone may remain essentially flat, going from $9.6 trillion in 2014 to $9.7 trillion in 2019.

The risks facing global corporate credit have evolved since Standard & Poor's published its first global borrowing forecast in 2012, when the firm expected $46 trillion of refinancing and new debt through 2017. Market confidence increased in 2013, partly boosting Standard & Poor's five-year demand projection to $53 trillion. Standard & Poor's predicted China would surpass the U.S. as the world's largest corporate borrower–which it did. As concerns about credit rationing and an economic slowdown in China subsided in 2014, Standard & Poor's revised its forecast for demand to $60 trillion through 2018, higher than our current projection of $57 trillion for 2015-2019.

Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

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SOURCE Standard & Poor's