The build-up of corporate bonds has hit unprecedented levels since the 2008 financial crisis and created a global stock of outstanding debt with a lower rating quality and higher payback requirements compared with past cycles, the OECD said.
In a report, the Paris-based Organisation for Economic Co-operation and Development said the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5 trillion in 2019. "Compared with previous credit cycles, today's stock of outstanding corporate bonds has lower overall credit quality, higher payback requirements, longer maturities and inferior covenant protection," the OECD said.
Non-financial corporations borrowed record amounts in 2019 after a return to more expansionary monetary policies early last year, the Paris-based organisation said.
It said the size and quality of corporate bond markets should be factored in when policymakers considered different scenarios underpinning monetary policy.
"These are features that may amplify the negative effects that an economic downturn would have on the non-financial corporate sector and the overall economy," it continued.
In every year since 2010, about one fifth of all corporate bond issues has been non-investment grade. This level reached 25% in 2019, the OECD said. It marked the longest period since 1980 that the share of non-investment grade issuance had remained so high, the OECD said, indicating that default rates in a future downturn were likely to be higher than in previous credit cycles. In the past three years, half of new corporate bond issuances were rated BBB, the lowest rating in the investment grade category.
"Absent the support of low interest rates or in the case of a business downturn, the same rating mechanics that allowed increased leverage will lead to downgrades that increase the borrowing costs for companies and limit their scope for investments," the OECD said.
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