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The Rise and Coming Fall of the Debt-Addicted Corporate Zombies

Mises Institute  ( Original )
MAR 12, 2018

If you allow companies to borrow money at nearly zero interest, most will borrow as much as they possibly can. After all, if you can achieve a paltry ROIC of 2%, you’re making money that costs you 1% to borrow.

But if your business is struggling and you needed free debt in order to survive, you’re not going to make it in a rising-rate environment. That one in five US corporations faces bankruptcy when rates rise is a testimony to how much of an illusion the underlying health of the US economic landscape truly is.

The end of the era of cheap money highlights the risk of “Enron-style” bankruptcies in many sectors, including renewable energy.

In fact, corporate net debt to EBITDA levels is at record highs. About 20% of US corporates face default if rates rise, according to the IMF.

The global renewable sector faces refinancing needs in the next seven to eight years that exceed its entire market capitalization (134 billion euros, Renixx Index).

It is not a problem of technology, it is the addiction to cheap debt and growth for growth sake. And it’s not just a problem in the renewable sector. The combination of lower revenues and increased debt costs is a danger. Cost of debt rises, and cost of equity soars due to higher perceived risk, which in turn can dry up the market for capital increases and refinancing.

ORIGINAL SOURCE: The End of Cheap Debt Will Bring a Wave of Bankruptcies by Daniel Lacalle at Mises Institute on 3/7/18