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Choking On Leverage.


Why has the stock market performed so well and how have companies stayed afloat during the pandemic of 2020? One word. Debt. Just like the rest of America that has suffered through the closings and lack of income, corporate America has been borrowing too.


According to an article published in December 2020 by Stanford Graduate School of Business, corporations worldwide carry far more debt than at the start of the crisis in 2008. And, the overall quality of that debt is lower.


As companies try to service their debt, the risks become higher as debt investors have surrendered their authority to oversight. Once having tough covenants to provide early warnings of ominous signs of downturns, the overwhelming number of leveraged loans are covenant light. During the pandemic many leveraged companies just satisfied their cash needs with more debt.


Some companies are raising cash with controversial deals that provide provisions for repayment over secured creditors. These covenants are not only controversial but leave secured creditors without recourse. The short of this is that highly leveraged companies are trying to manage through the pandemic crisis with more borrowing.


Companies with highly leveraged debt are in the squeeze. They are trying to tough it through their troubles with more borrowing tied to more covenant tough provisions. Public companies are financing stock buy backs among other efforts to boost stock shareholder prices.


Despite all the warning signs, investors are following higher yields and taking on more debt risk. Instead of reducing debt corporations are leveraging more. Wall street is back at again, allowing highly leveraged companies to trudge along being unable to utilize capital in productive areas of investment.


Institutional investors are as guilty in keeping poor performing companies floating along in a river of debt. You can see their boat from the shore, floating along as if nothing is wrong, but you cannot see all the holes under the water line. Of course, all of this is tied to investment accounts that most people are not understanding the facts of. They are invested in one type of index fund or another. These funds all have tens to hundreds of companies attached and the performance of that account is the aggregate of the fund.


How does the average person mitigate those risks? He hopes the fund managers and the institutional investment managers are doing their job. But this is wall street and many of the guard rails that were put in place after the 2008 collapse have been removed. Why do equity firms chase down companies to finance acquisitions with more debt? Because of greed. The high yield is their incentive to keep marginal companies floating along so we cannot see the holes in the bottom of the boat.


Do they know all of this? Of course. They can read balance sheets and income statements.

How and why is all of this happening? Greed. Everyone is wanting immediate gratification and it is driving the markets ands those who are managing them or manipulating them; however, you want to define it. The days of investing for long term yield and security seems to be over. We are overrun everyday day with visions of how to get rich quick. Fix up that house and turn it, or you can be a millionaire too, just like those people we watch on programs featuring quick rich gadgets that someone has developed.


How are those schemes helping the retired and fixed income people who have limited resources or fixed income? Investments used to be called widow and orphan equity investments with low risk but good yield for income. All the crashes in the last 30 years have devolved investing into specialized quick turn profits for professionals at the expense of the innocent investor. The stock markets today are no place for the inexperienced. More later.


Dennis Farrell

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