Print
A $6.3 trillion debt time bomb can blow America’s economy to pieces. Corporate America has accumulated more debt than it can pay.
Corporate debt equals 45% of America’s gross domestic product (GDP), The Week’s Jeff Spross noted. Moreover, the GDP includes all of America’s economic activity.
Corporate debt levels are now higher than they were before the Economic Crisis of 2007, Spross estimated. Shockingly, big business is accumulating the most dangerous debt.
Corporate Debt Time Bomb Is Worse Than 2008
“Since 2007, safe, highly rated corporate debt has fallen by roughly $1 trillion,” Spross wrote. “There’s a wide swath of riskier companies who now have $1 in cash for every $8 in debt, a record low (yes, worse than 2008).”
Furthermore, Spross blamed lenders whose standards are falling dramatically. Many lenders are deliberately making riskier leveraged loans. Additionally, companies with a ton of debt use leveraged loans to borrow more.
“Creditors are sacrificing various safeguards, particularly their priority in being repaid should the business go belly-up, all for the chance to hand out more high-yield loans,” Spross wrote. Top Wall Street analysts at Standard & Poor’s (S&P) agree with Spross’s analysis of the debt time bomb.
“And the riskiest borrowers are more leveraged than they were even during the financial crisis, according to S&P’s analysis,” CNBC observed.
$8 Of Debt For Every $1 Of Cash
“These borrowers have $8 of debt for every $1 of cash,” wrote Andrew Chang, who is the primary credit analyst at S&P Global.
The growing debt time bomb has many similarities to the Great Financial Meltdown of 2007-2008. Wall Street and mortgage lenders triggered that crisis by accumulating too much risky debt.
Further, Wall Street repackaged those loans into collateralized derivatives and marketed them as investments. When borrowers defaulted, the derivative market collapsed.
“Riskier corporate loans are also being repackaged in collateralized loan obligations that then sell as lower risk instruments to investors,” Spross wrote. “The problem isn’t anywhere as severe as the repackaging of mortgages in the housing crisis. But the similarities are unnerving. And the practice is spreading.”
Will The Corporate Debt Time Bomb Trigger A Retail Apocalypse?
The businesses most vulnerable to the corporate debt time bomb include the ailing retail sector.
Dollar Tree (NASDAQ: DLTR) is one of many retailers financing breakneck expansion with debt. Dollar Tree, which owns Family Dollar, accumulated $5.4 billion in debt to open 15,000 stores, Market Mad House reported.
The store could not pay its debts after just one or two seasons of falling sales. In fact, hundreds or thousands of stores across America would close if Dollar Tree’s debt time bomb exploded.
Dollar Tree is far from alone with respect to this kind of difficult predicament. Sears (NASDAQ: SHLD), which lost $424 million in 2nd Quarter 2018, reported debts of $5.526 billion in May.
Sears, which owns Kmart, plans to close 78 stores this summer. The company has already closed 112 stores this year. Many analysts expect Sears to go out of business within two years.
The Retail Apocalypse Is Pretty Much Already Here
Presently, hundreds of retail stores are closing even without the help of the debt time bomb.
Retailers are already in sorry shape, as various chains closed 9,000 stores in 2017, Moneywise estimated. There are at least 27 major retailers shutting down or closing stores this year. In particular, Kmart alone is closing 82 stores.
The Bon-Ton family of department stores is liquidating completely and shutting down 260 stores. Bon-Ton owns the Boston Store, Carson’s, Elder-Beerman, Herberger’s, and Younkers. Consequently, all those brands will disappear.
Supermarket Winn-Dixie is closing 94 stores. Notably, Subway is closing 500 sandwich shops. Rite-Aid is shuttering 600 drugstores. Toys R Us closed all 735 of its stores and shut down completely.
The retail apocalypse might be the event that sets off the debt time bomb. The corporate debt time bomb can trigger an economic meltdown as great as 2008.
All Americans need to prepare to disengage from the financial system. The corporate debt time bomb can wipe out trillions of dollars’ worth of assets and plunge the entire economy into chaos.
