Wrath of Financial Engineering: It’s Now Eating into Earnings

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Wrath of Financial Engineering: It’s Now Eating into Earnings
by Wolf Richter • October 15, 2015


Companies with investment-grade credit ratings – the cream-of-the-crop “high-grade” corporate borrowers – have gorged on borrowed money at super-low interest rates over the past few years, as monetary policies put investors into trance. And interest on that mountain of debt, which grew another 4% in the second quarter, is now eating their earnings like never before.

These companies – according to JPMorgan analysts cited by Bloomberg – have incurred $119 billion in interest expense over the 12 months through the second quarter. The most ever.

With impeccable timing: for S&P 500 companies, revenues have been in a recession all year, and the last thing companies need now is higher expenses.

Risks are piling up too: according to Bloomberg, companies’ ability pay these interest expenses, as measured by the interest coverage ratio, dropped to the lowest level since 2009.

Companies also have to refinance that debt when it comes due. If they can’t, they’ll end up going through what their beaten-down brethren in the energy and mining sectors are undergoing right now: reshuffling assets and debts, some of it in bankruptcy court. ................(more)

http://wolfstreet.com/2015/10/15/wrath-of-financial-engineering-eating-earnings-record-corporate-debt/