Thread by @FarialimaB

There is an American corporate credit crisis on the horizon that is every day looking more like the 07/08 mortgage crisis. Thread 👇

From 2000 to 2008 mortgage volume in the USA increased 2.3x

From 2010 to 2019 Q3 corporate debt raised 1.8x

Both periods had ultra-low rate policies, both markets had incentives for lenders to act irresponsibly striving for yield.

Banks in both cases make big money out of fees on debt issuance and can sell these papers to yield-seeking investors. When the risk is not on their balance sheet but they keep making money out of fees, there is a pervasive incentive to issue more debt with ever-decreasing quality

Rating agencies set what is considered investment grade. They have spectacularly (criminally one may say) failed during the GFC due to highly conflicting interests in the industry.

And during the last decade, their BBB (bottom of investment-grade) has become increasingly generous. BBB bond market represents 50% of all corporate bond market. They went from around 25% in 2009 to 50% in 2019

Exotic risky obscure financial products rise in popularity.

CDOs were very popular securities during de 2000s that blew up on everybody’s faces. They consist of repackaged subprime mortgages.

I introduce you to its cousin, CLOs. CLOs are built from leveraged loans -- sub-investment grade loans to companies with high levels of debt, or leverage.

Leverage Loans have been rising in demand for the past decade. Doing a 10x from 2002 to 2018

While CLO issuance has also been a thriving market

Maturing Debt
In the next 3 or 4 years, the amount of speculative corporate debt maturing is gonna increase exponentially, forcing the American economy to deal with this pile o sticking debt while facing a, now everyday more clear, end of an economic cycle.