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Global Scale of Restructuring Will Be Greater Than 2008

Global Restructuring
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EDITOR NOTE: According to BlackRock, the prospect of global restructuring post-COVID poses far greater risks than the one we faced during the 2008 global financial crisis. The reason for this is that an exorbitant amount has been invested in zombie or near-zombie companies--there’s $5.3 Trillion worth of sub-investment grade debt that has been accumulating since 2007. This was before the pandemic. Now that the COVID economy is hurting corporate revenues across the globe, many of these companies already under tremendous debt strain may end up buckling, potentially triggering another global financial crisis.

BlackRock Inc. says that the scale of restructuring needs globally could exceed the previous peak that followed the 2008 global financial crisis.

“One big reason is the significant growth in sub-investment grade debt,” the company’s research arm, BlackRock Investment Institute, said in a note dated Oct. 19. The amount of outstanding debt with ratings below investment grade, including loans and private credit, has more than doubled to $5.3 trillion since 2007, according to the asset manager.

As the overall cost of borrowing fell, companies loaded up on debt. This has left many vulnerable as their revenues came under pressure from Covid-19 related disruptions.

BlackRock isn’t the only one warning of the risks of company failures. Despite low rates, U.S. corporate bankruptcies posted their worst third quarter ever.

While supportive fiscal and monetary policies have helped companies raise capital and lower borrowing costs, “not all borrowers have benefited equally” and smaller firms have lacked access to the public markets, BlackRock said in the note.

Many companies may need to turn to private credit to restructure post Covid-19, according to the asset manager, and this offers potential return diversification for investors. Since 2007, private credit has been especially fast-growing, expanding to $850 billion by financing companies that would previously have looked to banks or the public high-yield market, it added.

Firms will likely have to evolve their business models amid the pandemic, and BlackRock sees a “wave of restructurings” and room for private credit to cater to smaller borrowers.

Originally posted on Yahoo! Finance

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