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| Economy | |
| This HOG Will Be Slaughtered In The Corporate Debt Bubble | |
| 2022-10-10 | |
[ZeroHedge] Old white dudes retiring their sleds.
As inflation continues to send interest rates higher, the debt of corporate America is going to cause serious problems. Credit analysts predict that up to 40% of the lowest-rated corporate borrowers will default. But all companies, even investment-grade credits, will suffer. A particular concern during the last decade has been companies using debt to “fake” growth. Declining businesses that can’t grow their revenues and earnings have been adding large amounts of debt to their balance sheets. Then, they use the money to buy back their own stock (which reduces share count, and artificially boosts earnings per share). It seems obvious to us that buying your own stock won’t help you market your products or services, invent new or better products, or lead you to innovative breakthroughs… in other words, the things that companies should be doing to grow. Instead, these new, higher debt loads will ultimately send these dying companies to their graves. A HOG ON THE EDGE Consider the case of iconic American motorcycle manufacturer, Harley Davidson (NYSE: HOG, $35.80). The company’s earnings peaked at just over $1 billion back in 2006 – and since then have dropped by 35% to $650 million last year. But you wouldn’t know it from just looking at earnings per share – which hit a new record high in 2022. That’s because the management of Harley Davidson has attempted to mask the decline of the core business with debt. Starting in 2005, just as earnings were peaking, management shifted their focus from engineering motorcycles, to engineering Harley’s share price. Starting with a previously pristine net cash position in 2004, the company subsequently accumulated over $5 billion in net new borrowings. That debt went into repurchasing stock, cutting Harley’s outstanding share count from 294 million in 2004 to 144 million today. The chart below shows the result of this financial maneuvering, effectively swapping debt for equity on Harley’s balance sheet: Now, the company finds itself leveraged up with net debt exceeding 5 times annual operating income. And over the next three years, the company faces nearly $3 billion in debt maturities, including nearly $1 billion next year alone. Refinancing those bonds – at much higher rates – will spike the company’s interest costs. Meanwhile, factor in a potential hit to demand from a recession… and this HOG could get taken out to pasture. And Harley is just one of countless examples. The last decade of rock-bottom financing costs spawned a horde of “zombie companies” – the walking dead of corporate America. Now, these companies face the potentially lethal combination of sharply rising financing costs and a coming hit to consumer demand, that could push them over the edge. | |
| Posted by:Skidmark |
| #4 Just don't ask me to bail out their creditors. |
| Posted by: Abu Uluque 2022-10-10 19:53 |
| #3 The result of Woke assed Harvard “educated“ CEOs. |
| Posted by: Cletle Shinese1880 2022-10-10 17:52 |
| #2 Hardly Ableson |
| Posted by: M. Murcek 2022-10-10 08:48 |
| #1 ...Harley's been coasting on a reputation that effectively ended long ago. Add to that their insistence on developing an E-Hog and they might as well pull a sheet over their face and clasp a lily in their hands. Mike |
| Posted by: MikeKozlowski 2022-10-10 06:28 |