January 6, 2020
EXCERPT: Corporate debt has now exceeded household debt for the first time in three decades, prompting lenders to take a closer look at their loan portfolios to ensure risky assets are sold off.
Corporate debt has now exceeded household debt for the first time since the early 1990s.
For the first time in about 30 years, corporate debt has now exceeded household debt in the US.
Household debt triggered the financial crisis over a decade ago, with a wave of foreclosures caused by the overleveraging of homes. But since then, underwriting standards have tightened, and the creditworthiness of consumers has been placed under much more stringent scrutiny.
US households have steadily improved and strengthened since the crisis. But non-financial corporations, on the other hand, are seeing an opposite trend when it comes to debt. Over recent years, corporate debt has been rising and has now exceeded household debt; the first time the US has seen this scenario since 1991.
According to the Federal Reserve, business debt has grown by about the same amount that household debt has decreased and is now at a record high of $15.987 trillion. More specifically, businesses have increased debt at a 5.7% annual pace over the third quarter, while household borrowing slowed to a 3.3% increase over the same period.
Why is Corporate Debt's Increase a Concern?
Borrowing levels among corporations now eclipse those of households, which could be a potential warning sign that the economy is headed for rough waters. With interest rates hovering near historic lows for much longer than anticipated, borrowing among businesses across the nation has spiked. And much like the housing crisis back in 2007-2008, such over-leveraging could be a significant concern, particularly if the economy falters in the near future.
The Fed Reserve is warning about US corporations' increasing dependence on leveraged loans.
The Fed has warned about the potential risks of high levels of corporate debt on economic expansion. Even though corporations have boosted borrowing, they have been retreating from investments such as new buildings and factories, which are vital to boosting economic growth. Instead, businesses are concerned about trade war uncertainty and a slowdown in global economic growth. Business investment has typically increased when borrowing rises, but companies are now more apt to use borrowed funds to finance buybacks and dividends.
According to data from federal officials, the net worth for households and non-profits increased 0.5% to $113.8 trillion after an increase of 1.7% over the previous period. And with more threats of tariffs on China, US stocks have increased at a slower pace over Q3 2019. Household real estate holdings rose to $32.9 trillion over the same period thanks to low mortgage rates, ongoing demand, tight inventory, and an increase in property values.
Banks Encouraged to Be Prudent With Their Loan Assets
Financial institutions are encouraged to be diligent when it comes to the types of loan assets they add to the books, as well as which assets to eliminate to ensure a healthy balance sheet. Selling off low-performing, high-risk assets and acquiring shorter-term, stronger-performing assets in their place is critical.
To do that, banks and lenders should partner with a seasoned loan sale advisor with a vast network of qualified buyers and sellers to help revamp their loan portfolios, and Garnet Capital can help with that.
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