According to S&P Global Ratings, tightening credit conditions could lead to increased defaults by companies with heavy debt loads. This according to a recent article in Bloomberg.
The article cites a February 5th report issued by the rating agency that says removing the “easy money punch bowl” could trigger a rash of defaults since heavily leveraged borrowers are more sensitive to rate hikes. It cites a global sample of 13,000 business entities showing that 37 percent of companies have debt-to-earnings multiples that exceed 5X, compared to 32 percent in 2007. Over the period between 2011 and 2017, the article says, global (non-financial) corporate debt grew by 15 percentage points—to 96 percent of GDP.
The rating agency argues that the boost to corporate earnings resulting in part from tax reform measures won’t be sufficient to offset these risks. According to S&P’s Terry Chan, “When debt is this steep and default rates are low, something’s gotta give.”