Will the Coronavirus Deal a Fatal Blow to Companies That Have Overleveraged Loans?

In the “Intersection of Business and Government” section last year in April, I wrote about my concerns with the growing debt being assumed by the financial markets and individual firms. I revisited the issue again in June referencing Washington Post columnist Steven Pearlstein’s similar concerns. Now the fears are growing that the coronavirus pandemic may exacerbate the situation even further.

The virus could precipitate panic by the holders of $10 trillion of corporate debt who will soon be watching an economy slide into recession at the same time some of these overly leverage loans are coming due. Even though there are checks on financial overextensions in the credit market, it is unclear if they will be able to handle the torrent of exposure by financial firms holding these corporate bonds.

One sector of the economy that is highly leveraged is the U.S. shale industry. Now caught between Russia and Saudi Arabia that are conducting a production/price war resulting in falling oil prices, U.S. shale producers’ shares are being hit hard in the recent stock market plunge. The markets fear many will be forced into bankruptcy.

According to the Federal Reserve, the ratio of debt to assets is at its highest in 20 years. Unfortunately, but not surprisingly, the biggest borrowers are the nation’s most indebted companies. Now faced with a complete shutdown of many industries as Americans stay home to avoid exposure to the coronavirus, these companies have no place else to turn to but the federal government. I doubt that these over leveraged companies will gain much sympathy from congress that is already dealing with massive expenditures to deal with one of the greatest national emergencies in modern history.

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Image Credit: “Mother’s Debt Bomb Cake” cartoon by Ben Garrison (via Medium, John Chalekson)