Here's why your 401K is filled with corporate debt junkies and why it's only getting worse:
In the boom years before the pandemic, the Fed encouraged S&P 500 titans to binge on trillions in debt, now the central bank is propping them up to avoid an economic catastrophe.took the pilot’s seat at American Airlines in December 2013, it seemed as though clear skies were ahead. His U.S. Airways had finally bagged a major partner by agreeing to combine with bankrupt American.
Fast-forward to April 2020, and a contagion known as SARS-CoV-2 has leveled the travel industry. American Airlines is flat broke, in part because of Parker’s profligate spending. Now the U.S. government has agreed to advance it $5.8 billion in the form of grants and low-interest loans—the largest payment to any airline in the government’s $25 billion industry bailout package. Many hedge fund investors have sold their shares, as has Berkshire Hathaway.
A year ago, Federal Reserve chairman Jerome Powell sounded an alarm, but he could barely be heard above the roar of the ascendant stock market. “Not only is the volume of debt high,” said Powell last May, “but recent growth has also been concentrated in the riskier forms of debt. . . . Among investment-grade bonds, a near-record fraction is at the lowest rating—a phenomenon known as the ‘triple-B cliff.
“We have a buyer and lender of last resort, cushioning pain but taking over the role of the free market,” groused Howard Marks, the billionaire cofounder of Oaktree Capital, in a memo April 14. “When people get the feeling that the government will protect them from [the] unpleasant financial consequences of their actions, it’s called ‘moral hazard.’ People and institutions are protected from pain, but bad lessons are learned.
The new and improved “asset light” McDonald’s no longer manages cumbersome assets; instead, it receives those payments and is sitting on tens of billions in debt. From 2014 through the end of 2019, McDonald’s issued some $21 billion in bonds and notes. It also repurchased more than $35 billion in stock and paid out $19 billion in dividends, returning over $50 billion to shareholders, far in excess of its profit over that period.
With most of its restaurants nearly empty during the pandemic, McDonald’s stock initially fell by almost 40%. Thanks to the Fed’s intervention, though, McDonald’s debt, which at first slumped to 78 cents on the dollar, recovered along with the stock, as the company quickly raised an additional $3.5 billion. McDonald’s insists that it entered the crisis with a strong balance sheet and overall financial health. It recently suspended its share repurchases.
Like McDonald’s, Yum sold many of its company-owned outlets to independent franchisees. Without access to capital markets and the Fed’s largesse, their future isn’t so certain. Yum is giving some of its franchise owners a 60-day grace period to make their royalty payments. David Gibbs, who replaced Creed as CEO in January, speculated at the end of April that if need be it would take over the franchises and sell them off.
After two of its 737 MAX planes crashed within five months and the FAA grounded the aircraft in 2019, Boeing’s aggressive financial policies were exposed, and it was forced to turn to debt markets for emergency cash. The company, which had essentially no debt in 2016, ended 2019 with $18 billion in net debt. This March, Boeing drew fully on a $13.
Once revered as Ma Bell, AT&T under CEO Randall Stephenson has become the"most indebted non-financial company the world has ever seen."Elliott and other investors were no doubt feeling ripped off by AT&T. Unlike Boeing, whose debt gorging and buybacks caused its stock to soar, AT&T’s shares have gone nowhere for a decade. What the debt-dependent duo do have in common is that financially, at least, they bear little resemblance to their former blue-chip selves.
CEO Vicki Hollub of Occidental Petroleum has increased debt fivefold since 2016. Covid and the collapse in crude oil prices, have put her company on bankruptcy-watch.General Dynamics, known for its Navy ships, Gulfstream jets and government contracts, had little debt in 2010, but since CEO Phebe Novakovic took over in 2013, it has bought back about $13 billion in stock and paid out $6 billion in dividends, finishing last year with $11 billion of net debt.
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