While household debt is under control, Bank of America CEO Brian Moynihan said that corporate debt is still on a rough patch as the number continues to increase.
According to Moynihan, big companies need to clean up their balance sheet as debt ratio is higher and can cause a recession if the economy slows down.
“When the economy slows down, the reality is those companies will have a tough time,” said Moynihan. He also mentioned that this situation is a result of companies borrowing ‘too much’ money from banks even though their profit won’t cover for the loan.
Moynihan also added, “We don’t see anything yet because the economy’s good, the companies are making money. The issue that’s there is in the leveraged finance.”
Given that the economy is doing okay, what Moynihan fears is that the impact of unsettled loans can do to companies. If one company cannot pay for the increasing interest, chances of bankruptcy are higher.
In an article published by CNN, it is said that some companies tend to borrow heavily and get leverage up to 12 times their earnings.
Although the US economy is still thriving and dominates the world, the problem of corporate debt can take a toll on the economy if companies will continue to borrow a large sum of money. Since 1947, the ratio of nonfinancial corporate debt to GDP is incredibly high, which makes it alarming for banks.
Bank of America is among the big names in the finance sector that offers leveraged loans. BoA accounts for over 10 per cent of the market share, according to Bloomberg. A total of $317 billion leveraged loans are out, which is a massive decline compared to last year’s $688 billion.
Although the bank is still offering leveraged loans, it is slowly ‘shielding away’ from the risk that this type of loan has to offer.