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The Moral Hazard of Corporate Borrowing

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The Moral Hazard of Corporate Borrowing

 

Two years ago we cautioned about corporate debt levels https://youtu.be/9lYFPfmaQBQ. Now with the virus, corporations are going on a debt issuance binge. Debt issuance is up 92% year over year. The Federal Reserve is only adding juice to the “juice bowl” by buying corporate debt for the first time ever.

Excessive debt levels can be a detriment to shareholders. General Electric is a good example of this as they issued a huge amount of debt in 2016 ($30 a share) to buy back shares. Today, GE stock is $6 a share and their debt is hindering their ability to grow.

Written by

James E. Gore, CFA®, CAIA, CMT®

Jim serves as the Chief Investment Officer of THOR, is a Chartered Financial Analyst charter-holder, a Chartered Alternative Investment Analyst, a Chartered Market Technician, a member of the Association for Investment Management and Research and a member of the Cincinnati Society of Financial Analysts.

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