The Phaserl


IMF Report: U.S. Corporate Debt Could Be Trump’s Waterloo

by Pam Martens and Russ Martens, Wall Street On Parade:

As U.S. equity markets continue to price to perfection a grab bag of promised corporate giveaways from their Best Forever Friend, President Donald Trump, a group of researchers at the International Monetary Fund (IMF) had the temerity to ask last month – what could possibly go wrong.

In their April 2017 “Global Financial Stability Report,” IMF researchers methodically pare back the rosy lenses of the U.S. equity market and focus on the warning signs in the U.S. corporate debt market. Two particular findings have the power to potentially jolt the equity markets out of their euphoric stupor.

The researchers note:

“The [U.S.] corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010…” [Italics added.]

“The number of [U.S.] firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings. This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise. The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities. Together, these three industries currently account for about half of firms struggling to meet debt service obligations and higher borrowing costs.”

The report acknowledges that equity markets “have taken a relatively benign view” of the downside risks and warns that there could be a “swift repricing of risks in the event of policy disappointment.”

As for the windfall from President Trump’s promised slashing of the corporate tax rate, the IMF researchers have this to say:

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