Corporate Debt: Where is the Danger?

Saeidinezhad, Elham (2019): Corporate Debt: Where is the Danger? Published in: Private Debt Project Publications (May 2019)

Abstract

This paper will attempt to take a first step toward building a granular framework by examining the sustainability of American corporate debt through the sustainability analysis of nonfinancial corporate sectors. This approach does not displace but rather complements traditional measures used by analysts that rely on aggregated and netted metrics. By examining sectoral debt composition based on both dimensions of corporate indebtedness, a mixed picture emerges. While some sectors show more resiliency to a downturn than standard analysis implies, other sectors, particularly within the utilities sector, show far greater exposure to profitability and interest rate shocks than commonly understood. It is important to note that while this paper evaluates the liquidity of non-financial corporate debt sectors in response to adverse events, it does not examine the ultimate holders of this debt and their liquidity requirements. Therefore, it does not provide us with a complete picture of the systemic vulnerabilities presented by these instruments.

• Item Type: MPRA Paper
• Language: English
• Keywords: corporate debt, leverage, liquid assets, debt repayment capacity
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Baum, A., C. Checherita-Westphal, and P. Rother, 2013. “Debt and Growth: New Evidence for the Euro Area.” Journal of International Money and Finance 32: 809–21.

Berg, T., and J . Gider, 2017. "What Explains the Difference in Leverage between Banks and Nonbanks?", Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(06), pages 2677-2702, December.

Bernanke, B., Gertler, M., and S. Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework", Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.

Bernanke, B., M. Gertler, and S. Gilchrist, 1999. “The Financial Accelerator in a Quantitative Business Cycle Framework.” in Handbook of Macroeconomics, Vol. 1, J. B. Taylor and M. Woodford (eds), pp. 1341-93, Amsterdam: North-Holland.

Bersin, P., Pelster, P., Schwartz, P., and B. Van der Vyver, 2017. “2017 Deloitte Global Human Capital Trends: Rewriting the rules for the digital age.” Deloitte Publications.

Billett, M. T., Dolly King, T.H., and D. C. Mauer, 2007. "Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants." Journal of Finance, American Finance Association, vol. 62(2), pages 697-730, April.

Buttiglione, L., P. R. Lane, L. Reichlin, and V. Reinhart. 2014. “Deleveraging? What Deleveraging?”, Geneva Reports on the World Economy 16. Geneva: International Center for Monetary and Banking Studies and Centre for Economic Policy Research.

Carlstrom, C. T. and T. Fuerst, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis." American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.

Cantillo, M., and J. Wright, 2000. “How do firms choose their lenders? An empirical investigation.” Review of Financial Studies, 13, pp. 155-89.

Cecchetti, S. G., M. S. Mohanty, and F. Zampolli. 2011. “The Real Effects of Debt.” BIS WorkingPaper 352, Bank for International Settlements, Basel.

Correa, R., Edge, R. M., and N. Liang, 2017. “A New Dataset of Macroprudential Policy Governance Structures.” IFDP Notes. Washington: Board of Governors of the Federal Reserve System, November 2017, https://doi.org/10.17016/2573-2129.38.

Claessens. S., and M.A. Kose, 2018. "Frontiers of macro-financial linkages." BIS Papers, Bank for International Settlements, number 95, April.

Chui. M., Fender, I., and V. Sushko, 2014. "Risks related to EME corporate balance sheets: the role of leverage and currency mismatch." BIS Quarterly Review, Bank for International Settlements, September.

De Bondt, G., and D. Marqués-Ibáñez, 2004. "The high-yield segment of the corporate bond market: a diffusion modelling approach for the United States, the United Kingdom and the euro area." Working Paper Series 313, European Central Bank.

De Fiore, F., and H. Uhlig, 2015. "Corporate Debt Structure and the Financial Crisis." Working Paper Series 1759, European Central Bank.

Deloitte Center for Financial Services. 2018. “2018 Real Estate Outlook: Optimize opportunities in an ever-changing environment.” Deloitte Publications.

Deloitte Resources Study. 2017. “Energy management: Sustainability and progress.” Deloitte Publications.

Deloitte Center for Energy Solutions. 2017. “2017 outlook on oil and gas”, Deloitte Publications.

Deloitte Center for Energy Solutions. 2016. “2016 outlook on oil and gas”, Deloitte Publications.

Denis, D., and V. Mihov, 2003. “The choice among bank debt, non-bank private debt and public debt: Evidence from new corporate borrowings.” Journal of Financial Economics, 70, pp. 3-28.

Esho, N., Lam, Y., I.G. Sharpe, 2001. “Choice of financing source in international debt markets.” Journal of Financial Intermediation, 10, pp. 276-305.

Frame, W. S., and E. Steiner, 2018. "Unconventional Monetary Policy and Risk- Taking: Evidence from Agency Mortgage REITs." FRB Atlanta Working Paper 2018-8, Federal Reserve Bank of Atlanta.

Gaspar, V., M. Obstfeld, and R. Sahay, 2016. “Macroeconomic Management When Policy Space Is Constrained: A Comprehensive, Consistent, and Coordinated Approach to Economic Policy.” Staff Discussion Note.

Grenadier, S. R., and A. Malenko, 2011. "Real Options Signaling Games with Applications to Corporate Finance." Review of Financial Studies, Society for Financial Studies, vol. 24(12), pages 3993-4036.

Goyal, V., and F. Packer. 2017. "Corporate leverage in emerging Asia", BIS Papers chapters, in: Bank for International Settlements (ed.), Financial systems and the real economy, volume 91, pages 65-94 Bank for International Settlements.

Haughwout, A., Lee, A., Tracy, J., and W. Van der Klaauw. 2011. "Real estate investors, the leverage cycle, and the housing market crisis." Staff Reports 514, Federal Reserve Bank of New York.

International Monetary Fund (IMF), 2016. “Fiscal Monitor: Debt—Use It Wisely.” Washington, October.

International Monetary Fund (IMF), 2014. “Global Financial Stability Report—Risk Taking, Liquidity, and Shadow Banking: Curbing Excess while Promoting Growth.” Washington, October.

International Monetary Fund (IMF), 2017. “Global Financial Stability Report: Is Growth at Risk?” Washington, DC, October.

International Monetary Fund (IMF), 2019. “Global Financial Stability Report: Vulnerabilities in a Maturing Credit Cycle.” Washington, DC, April.

Frank, M., and V. K. Goyal, 2009. "Capital Structure Decisions: Which Factors are Reliably Important?" MPRA Paper 22525, University Library of Munich, Germany.

James, C., and J. Houston, 1996. "Evolution Or Extinction: Where Are Banks Headed?" Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 8-23.

Johnson, S. A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure." Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.

Krishnaswami, S., Spindt, P., and V. Subramaniam, 1999. “Information asymmetry, monitoring, and the placement structure of corporate debt.” Journal of Financial Economics, 51, pp. 407-34.

Krugman, P. 1988. “Financing vs. Forgiving a Debt Overhang.” Journal of Development Economics 29 (3): 253–68.

McKinsey Global Institute., 2015. “Debt and (Not Much) Deleveraging.” February. http://www.mckinsey.com/insights/ economic_studies/debt_and_not_much_deleveraging

Moore, J., and & N. Kiyotaki, 1995. "Credit Cycles." Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.

OFR. 2017. “Financial Stability Report.” OFR: Office of Financial Research.

Psillaki, M., and N. Daskalakis, 2009. "Are the determinants of capital structure country or firm specific?" Small Business Economics, Springer, vol. 33(3), pages 319- 333, October.

Rajan, R. and L. Zingales, 1995. “What do we know about capital structure? Some evidence from international data.” Journal of Finance 50(5): 1421{1460.

Reinhart, C. M., V. R. Reinhart, and K. S. Rogoff, 2012. “Public Debt Overhangs: Advanced-Economy Episodes since 1800.” Journal of Economic Perspectives 26 (3): 69–86.

Sachs, J. D, 1989. “Conditionality, Debt Relief, and the Developing Country Debt Crisis.” In Developing Country Debt and the World Economy, edited by J. D. Sachs. University of Chicago Press.

Tirole, J, 2006. “The Theory of Corporate Finance.” Princeton: Princeton University Press.

Titman, S. and R. Wessels, 1988. “The Determinants of Capital Structure Choice.” The Journal of Finance, 43: 1-19.