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Illustration: Shoshana Gordon/Axios

The $10.6 trillion U.S. corporate debt markets are at an inflection point. Last year's turmoil is in the rearview mirror, and companies are ramping up all the shareholder-friendly activities they couldn’t do during the pandemic — and looking to fund some of it with debt.

Why it matters: The economy is built on a foundation of credit — and what happens next will determine how soon and how bad the next default cycle will be.

Catch up quick: Government programs helped bring companies back from the brink last year. The Federal Reserve's liquidity injections kept the debt market open for business, and fiscal policy provided money for consumers to keep buying things.

The big picture: On average, U.S. companies’ leverage ratios and ability to afford interest payments are even better now than they were before the pandemic, estimates S&P Global Market Intelligence.

  • Meanwhile, both the high yield and investment grade bond indexes are at or near record low yields — meaning it’s never been cheaper for companies to borrow money.

The impact: That’s led to record new debt placements.

  • "Debt has become more affordable. As a consequence, all else equal you are incentivizing companies to carry more debt," Scott Ruesterholz, fixed income portfolio manager at Insight Investment, tells Axios.
  • The U.S. high yield and leveraged loan markets are "on pace to set new annual records for gross supply," Goldman Sachs analysts wrote last week. And in the investment-grade market, Goldman forecasts that 2021 will rank as the second-busiest year of the post-financial crisis era — behind 2020.

Last year companies let many of those debt proceeds sit on their balance sheets as a safety buffer. But that's beginning to change.

For instance: Oracle opted to sacrifice its credit ratings to pile on $15 billion of debt this past spring to fund share repurchases and buybacks. Moody’s now rates Oracle's debt at the lower end of investment-grade status.

  • And in high yield, Pilot Travel Centers is in the process of a multi-billion debt sale that will provide billions in cash to buy back preferred equity held by its wealthy owners.

Going forward, some investors expect a continued uptick in this style of corporate behavior: taking out debt to fund things like share buybacks and dividends, or highly levered M&A deals.

Threat level: The "bad" scenario is too many companies taking advantage of the cheap capital to finance aggressive financial engineering that puts them too far in debt.

  • This sets up a big market correction or pulls forward a deeper default cycle, which leads to losses for investors like mutual funds that buy the debt.

Some credit managers think that guardrails remain in place to keep more aggressive debt deals isolated to a small portion of companies — rather than create systemic market-wide concern.

  • For one, equity valuations are high enough to put a ceiling on M&A activity, and even debt-financed stock buybacks, says Steven Boothe, fixed income portfolio manager at T. Rowe Price.
  • And management teams remain on defense after the scare of a lifetime last year. "The dark days of March and April last year are still very fresh in the minds of CEOs and boards. I think we need to move further away from that event before most are going to start being really aggressive," says Will Smith, high yield portfolio manager at AllianceBernstein.
  • A new era of antitrust enforcement, led by Biden appointments known as critics of big tech — and big everything — is also likely to mute ambitions for major transformative M&A, Boothe adds.

The bottom line: Companies have used the wide-open capital markets to push out maturities that were set to come due in the next few years, so imminent default risk is exceedingly low.

  • "The question is, are we setting something up for three to four years down the road?" Roberta Goss, co-head of the bank loan and CLO platform at Pretium, says.

Go deeper

Felix Salmon, author of Capital
Oct 21, 2021 - Economy & Business

Meme stonks lose their appeal to the world of crypto

Data: Cardify; Chart: Axios Visuals

That sucking sound you hear is the outflow of meme-chasing dollars from the stock market.

Why it matters: The caravan has moved on. The dream of getting rich quick still lives, but today it's more often found in the world of crypto, NFTs or even sports betting than it is in the stock market.

Venture capital in Arkansas up 151% from 2020

Expand chart
Data: PitchBook & NVCA; Chart: Jacque Schrag/Axios

After largely taking a year off, angels are back in Arkansas. Angel investors.

What's happening: Venture capital invested in Arkansas companies through the third quarter was valued at an estimated $89.7 million. That's up 151% from $35.7 million for all of 2020.

  • The numbers, shared with Axios, are from PitchBook, a private equity database company.

Why it matters: Private investment gives startups and young companies resources to grow more rapidly, often before sales can catch up with the need to expand.

  • Since the investment usually comes with both risk and potential, investors stand to make a higher return.

By the numbers: An estimated 77% of the statewide total was invested in Northwest Arkansas companies in the first three quarters of the year.

  • Companies in the Little Rock metro, which includes North Little Rock and Conway, received the rest.
  • The number of deals in Arkansas remains low with only 18 so far this year in NWA and 5 in the Little Rock metro.
  • Still, the value of deals for 2021 is at an all-time high and will end well over the $71 million reported in 2019.

Zoom out: While investments in Arkansas slowed during 2020, they didn't miss a beat at the national level.

  • Total deal value in the U.S. through the third quarter of this year is estimated to be $54.7 billion, up about 24% from $44.2 billion in 2020.

Venture capital deals in Austin, Texas — a metro many like to compare with NWA — were valued at $3.78 billion so far this year.

Zoom in: The leader in NWA is Fayetteville's AcreTrader, a company that helps consumers invest in shares of farmland. The company has received about $18 million in venture capital this year, which is below PitchBook's estimate of $22 million.

  • AcreTrader's investor relations team told Axios the anomaly is probably due to how some of the company's investments (on behalf of its consumers) get reported in the news and then are inadvertently added to data used by PitchBook.

💭 Worth's thought bubble: Economists, entrepreneurs and those who consult entrepreneurs have told us there aren't enough investments made in NWA companies.

  • Given the disparity between values, our region has a long way to go to be competitive with economies at high-tech hubs across the country.
Felix Salmon, author of Capital
Updated Oct 21, 2021 - Economy & Business

How the pandemic caused a corporate rebound

Illustration: Sarah Grillo/Axios

WeWork becomes a public company today worth more than $9 billion — a vindication of the expensive turnaround strategy employed after it spectacularly imploded in 2019. Like many companies that find themselves at death's door, that which didn't kill them made them stronger.

Why it matters: Hertz, Alamo Drafthouse, Airbnb, and Toast are among the currently-thriving companies that were shaken to the core in the early days of the pandemic — providing further evidence for the theory that, in the words of former Fast Company editor Bill Taylor, "companies can't be great unless they've almost failed."

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