RISING CORPORATE DEBT：PERIL OR PROMISE？
Susan Lund | Washington, DCJonathan Woetzel | ShanghaiEckart Windhagen | FrankfurtRichard Dobbs | LondonDiana Goldshtein | Washington, DCDISCUSSION PAPERJUNE 2018RISING CORPORATE DEBT PERIL OR PROMISE? 2McKinsey Global Institute Copyright © McKinsey & Company 2018Since its founding in 1990, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey & Company, MGI aims to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth, natural resources, labor markets, the evolution of global financial markets, the economic impact of technology and innovation, and urbanization. Recent reports have assessed the digital economy, the impact of AI and automation on employment, income inequality, the productivity puzzle, the economic benefits of tackling gender inequality, a new era of global competition, Chinese innovation, and digital and financial globalization.MGI is led by three McKinsey & Company senior partners: Jacques Bughin, Jonathan Woetzel, and James Manyika, who also serves as the chairman of MGI. Michael Chui, Susan Lund, Anu Madgavkar, Jan Mischke, Sree Ramaswamy, and Jaana Remes are MGI partners, and Mekala Krishnan and Jeongmin Seong are MGI senior fellows.Project teams are led by the MGI partners and a group of senior fellows, and include consultants from McKinsey offices around the world. These teams draw on McKinsey’s global network of partners and industry and management experts. Advice and input to MGI research are provided by the MGI Council, members of which are also involved in MGI’s research. MGI council members are drawn from around the world and from various sectors and include Andrés Cadena, Sandrine Devillard, Richard Dobbs, Tarek Elmasry, Katy George, Rajat Gupta, Eric Hazan, Eric Labaye, Acha Leke, Scott Nyquist, Gary Pinkus, Sven Smit, Oliver Tonby, and Eckart Windhagen. In addition, leading economists, including Nobel laureates, act as research advisers to MGI research.The partners of McKinsey fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi. IN BRIEFRISING CORPORATE DEBT: PERIL OR PROMISE?Since the 2008 financial crisis, global debt has continued to rise. Much of this increase is due to a surge in government borrowing, but corporate debt has risen over this period by nearly as much—a notable development. Corporate bond issuance has increased 2.5 times over the past decade, creating a broader and deeper market in many countries. This is welcome news, but there are also vulnerabilities. Key findings in this discussion paper include: Total debt (including household, nonfinancial corporate, and government debt) has grown by three-quarters since the financial crisis, from $97 trillion in 2007 to $169 trillion in the first half of 2017 in constant exchange rate terms. Government debt accounts for 43 percent of this increase; less noticed has been growth in nonfinancial corporate debt, which is nearly as big. Since the financial crisis, many large corporations around the world have shifted toward bond financing because commercial bank lending has been subdued. Today, nearly 20 percent of total global corporate debt is in the form of bonds, nearly double the share in 2007. Annual nonfinancial corporate bond issuance has increased 2.5 times, from $800 billion in 2007 to $2 trillion in 2017. The global value of corporate bonds outstanding has increased 2.7 times since 2007 to $11.7 trillion, doubling as a share of GDP. The long-awaited deepening of corporate bond markets and the diversification of corporate financing is good for the health of global financial markets. But there are risks. Noninvestment-grade bonds have almost quadrupled in size over the past decade, reaching $1.7 trillion in advanced companies. Between 2018 and 2022, a record $1.6 trillion to $2.1 trillion of corporate bonds will mature annually. Our analysis shows some of those issuers have fragile finances, and corporate defaults are already above the long-term average. Even at today’s low interest rates, 20 to 25 percent of corporate bonds in Brazil, China, and India are at higher risk of default (issued by companies with an interest coverage ratio below 1.5). In our simulation of a 200-basis-point rise in interest rates, that share could inc
