BlackRock Investment Institute

Macro insights

Coronavirus shock: Keeping an eye on corporate credit

The coronavirus shock has cast a spotlight on the availability and cost of funding for corporates, especially in the U.S. and Europe. The widening of credit spreads, with echoes of the global financial crisis (GFC), are stoking concerns that a major tightening of financial conditions could crimp growth and exacerbate cashflow squeezes that are starting to strike various parts of the economy. But this is not 2008, in our view – for corporate credit or the global economy more broadly.

U.S. and UK non-financial corporate credit growth, 2000-2020

Sources: BlackRock Investment Institute and the Bank of International Settlements, with data from Refinitiv Datastream , March 2020. Notes: The chart shows annual private non-financial credit growth for the U.S. (orange line) and the UK.

The widening of spreads during the GFC partly reflected broad concerns about the sustainability of corporate borrowing – stresses which were generated inside the financial system by excessive credit growth. In contrast, the credit market sell-off of the past week stems from the coronavirus outbreak and the plunge in oil prices after the breakdown between OPEC and Russia on production. As long as a comprehensive and co-ordinated policy response is delivered soon, we don’t see the outbreak as an expansion-ending event.

The backdrop for corporate credit is stronger than it was in the run-up to the GFC. Corporate non-financial credit growth in the U.S. has been stable over the past few years – and well below the rates seen in the run up to the GFC. See that chart above. The picture in Europe is been more mixed, with euro area core credit expanding solidly but peripheral credit remaining stagnant. Growth in the UK has been more subdued on average, though more volatile than it was in the past and relative to other countries.

Judging by past cycles, U.S. leverage relative to revenue is elevated. The corporate debt stock is around 75% of GDP, just above its peak before the 2008 financial crisis. But the lower-for-longer interest rate environment has helped to improve debt service ratios and the broader liquidity position for corporate credit looks more healthy. But there are pockets of concern – such as leveraged loans – which appear stretched. And market liquidity can dry up suddenly as it did in December 2018, which could encompass even solvent profitable companies.

Central banks are rolling out a variety of facilities to backstop corporate lending, especially to small- and medium-sized enterprises (SMEs). With demand for credit likely to grow substantially as firms cover working capital shortages, we will keep an eye on the adoption and implementation of targeted measures aimed at providing timely credit to affected firms – especially SMEs – as confirmation that such a policy response is being delivered.

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