A $3 Trillion Time Bomb?

For most of the past 10 years, corporate debt has been little more than an afterthought for many investors. With interest rates low, the economy strong, and relatively easy lending standards, the thinking went that borrowing to buyback shares or finance acquisitions was a low-risk strategy. But the next five years could severely test that Pollyanna view.

USD Investment Grade Debt Maturing

(in Billions)

Heartland Advisors Value Investing Investment Grade Debt Chart

Source: Wells Fargo Securities and Bloomberg L.P.
Economic predictions are based on estimates and are subject to change.

As shown in the chart, roughly $3.3 trillion—48% of all current outstanding commercial debt—will come due by 2023. The sheer volume would be challenging for the market to digest in the best of scenarios, let alone this late in an economic expansion. Adding to our sense of caution are early signs that lending standards have begun to tighten for commercial and industrial borrowers. As banks become more stringent, borrowers could find themselves paying higher rates just to secure the capital they need to retire outstanding obligations.

While we don’t currently see signs of a full-blown financial crisis on the horizon, we do believe that excessive debt adds unnecessary challenges to companies in general and will likely be a headwind for heavy borrowers in the intermediate term going forward. Not surprisingly, our long-held caution toward financial leverage plays out in our investment decisions: our portfolios are underweight debt-laden companies relative to their benchmarks.

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Author

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value, Mid Cap Value, and Value Funds and their corresponding separately managed account strategies. He also is President and Director of Heartland Funds. He has 19 years of industry experience, 15 at Heartland.

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