Corporate Balance Sheets Beginning to Deteriorate

Tuesday, 13 Nov 2012 07:58 AM

By Dan Weil

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One bedrock support for blue-chip stocks and corporate bonds as they soared for the past 3 ½ years has been corporate balance sheets.

Through cost cuts and debt reduction, top companies put their financial houses in order. But the situation is starting to slip, according to Richard Barley of The Wall Street Journal. “Now they [company finances] are eroding,” he writes.

Citigroup analyzed data from 275 investment-grade companies and found that the median debt burden has soared 32 percent since the third quarter of 2010. Dividend increases and share buybacks are helping to push the trend.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Ominously, corporate credit ratings are starting to drop. Standard & Poor’s downgraded the debt of 93 industrial companies in the third quarter, while upgrading the debt of only 36.

Experts are concerned that investors have flocked to bonds of safe-haven, non-financial companies, Barley writes. “That creates the risk that some bonds are now overpriced for a cycle of rising leverage.”

Allyn Arden of Standard & Poor’s says corporate balance sheets were never really improving in a sustained way.

“The trend of declining credit quality is nothing new, spanning more than three decades, although the migration down the ratings scale has accelerated over the past 12 years,” he tells the Financial Times.

Investors have grown nervous about corporate bonds since last Tuesday’s election. A key credit-default swaps index, which measures risk in the market, approached a three-month high Friday.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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