Record amount and declining quality for corporate bonds-OECD

Corporate bond issues returned to their highest historic level in 2019 but this increase was accompanied by a deterioration in their quality and therefore an increase in potential risks in the event of a cyclical downturn, estimates the OECD in a study published Tuesday.

Non-financial companies issued a total of 2,100 billion dollars (1,940 billion euros) of bonds last year, a level equivalent to the record of 2016 and which marks " a clear trend reversal after the fall in emissions." 2018 corporate debt , ”says the Organization for Economic Cooperation and Development. This increase, after a marked decline in the second half of 2018 in response to increases in key interest rates and the rise in fears of an economic slowdown, is explained by the change in discourse of the major central banks in early 2019 in favor of policies more accommodating, the study explains. The overall stock of non-financial corporate bond debt reached an unprecedented level of $ 13.5 trillion in late 2019, she said, more than twice its level in late 2008.

In addition to the rebound in the amounts issued, the OECD notes a further deterioration in the overall quality of corporate bonds. She explains that securities rated below the investment grade category accounted for 25% of issues last year compared to around 20% over the previous years since 2010. The share of securities rated BBB, the lowest tranche of the investment category also reached 51% of all emissions, compared to only 39% in 2000-2007.

This trend, say the authors of the study, implies the risk of default rates exceeding their historical levels in the event of a downturn in the credit cycle. They also note a lengthening of maturities (nearly 13 years on issue on average against 9.4 years at the start of the 2000s) and increased sensitivity to changes in interest rates. Without seeing it as an imminent risk, the OECD concludes that " the quality and dynamics of the corporate bond markets have become a factor to be taken into account in the different scenarios on which monetary policies are based ".