The volume of corporate debt hit an all-time high of $13.5 trillion at the end of 2019, but the overall quality of bonds fell below levels seen before the global financial crisis, according to a new OECD report.
Corporate bond issuance has been broadly driven by structural reforms and more expansionary monetary policy worldwide, emerging as a viable source of long-term funding for non-financial companies since the crisis. As a result, non-financial companies globally borrowed around $2.1 trillion in the form of corporate bonds in 2019.
However, the report from the 36-member Organisation for Economic Co-operation and Development (OECD) highlighted that compared to previous credit cycles, today's trove of outstanding corporate bonds is of lower overall credit quality, with higher payback requirements, longer maturities and weaker investor protection.
This may render the non-financial corporate sector and broader economy more vulnerable to the negative effects of an economic downturn.
The OECD was formed in 1961 as an intergovernmental organization aimed at stimulating global economic progress and trade, mostly consisting of the most advanced countries in the world, which comprise around 80% of global trade and investment.
OECD Secretary-General Angel Gurria said the high levels of leverage in the corporate sector "make it essential to put in place reforms that make all parts of the capital markets fit for purpose."
"This must include steps to improve the ability of equity markets to strengthen corporate balance sheets and support long-term investments," he added.
Just over half (51%) of all new investment grade bonds were rated BBB, the lowest investment grade rating available.
During the period between the years 2000 and 2007, prior to the global financial crisis, only 39% of investment grade corporate bond issuances were BBB-rated.
Non-investment grade bond issuance has also increased, the OECD report said, accounting for 25% of all non-financial corporate bond issues in 2019. This figure has remained at 20% or higher since 2010, the longest period since 1980 in which the portion of non-investment grade issuance has remained this high.
The OECD suggested that as a result, default rates in a future downturn would likely be higher than in previous credit cycles.
In 2019, only 30% of the global outstanding stock of non-financial corporate bonds were rated A or above and issued by companies from advanced economies, the report highlighted, and the growing outstanding stock is also correlated with increased repayment obligations.
At the end of 2019, non-financial companies globally had to repay or refinance an unprecedented $4.4 trillion in corporate bond debt within three years, according to the report, representing a record 32.4% of the total outstanding amount of corporate bonds compared to just 25% 10 years ago.
The OECD highlighted that the low-rate environment and mechanics of credit ratings have allowed companies to increase debt ratios and maintain their credit ratings.
However, the report cautioned that without the safety of low interest rates, or in the event of a business downturn, these rating mechanics will result in downgrades which drive up borrowing costs and limit room for investment.