Fragile corporate debt emerges as Bank of Canada vulnerability



The Bank of Canada has added one new worry to its assessment of financial stability: corporate borrowing.Debt-to-income levels among Canadian non-financial corporations are “well above” historical levels and are one of the top vulnerabilities to the country’s financial system, the central bank said Thursday.Non-financial corporate debt was 315 per cent of income at the end of 2018, the Bank of Canada said in its annual Financial System Review. In addition, the share of outstanding debt owed by firms that have poor debt-service capacity and low liquid asset holdings is higher than is typically the case.The central bank singled out commodity companies, which it says are carrying higher debt loads while suffering from falling income due to declines in global resource prices.Rising corporate debt is a phenomenon affecting many developed countries, the central bank said, occurring as stricter regulation reduces the share of debt funded by banks. That has allowed nonbank credit providers to step in.The global market for high-yield debt is now larger than it was before the financial crisis, lending standards have loosened and corporate-debt quality has deteriorated in many countries, placing investors at higher risk, the central bank said. It pointed to Canadian non-financial issuers of lower credit quality, who mostly raise funds in the U.S. due to the small size of Canada’s high-yield bond market.Key PointsThe share of bonds issued in U.S. dollars by Canadian firms grew to about 60 per cent in 2018, versus 40 per cent in 2007The outstanding amount of leveraged loans to non-financial firms has more than doubled in four years, to $175 billion (Canadian) from $80 billion; about one-third of these leveraged loans are covenant-lite, compared with one-fifth previouslyThe debt-at-risk ratio, excluding commodities companies, increased to about 13 per cent last year from 9 per cent the year before. This is still below the 15 per cent ratio in 2015 and in line with levels reached a decade ago during the financial crisis, but above its historical averageFunding from leveraged loan and high-yield bond markets accounts for at least 12 per cent of total non-financial corporate debt, 6 percentage points higher than a decade agoNon-financial corporate issuers rely heavily on nonbank credit providers and the amount of bonds outstanding issued by Canadian non-financial firms increased to to $580 billion (Canadian) in 2018, from $270 billion in 2008

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