The Corporate Debt Tsunami of 747 Trillion Won Sweeping the Global Economy

The scale of non-performing debt among global companies pushed to the brink of default due to the burden of high interest rates has reached 747 trillion won.

Bloomberg reported on the 19th (local time) that the global volume of non-performing bonds or loans exceeds $600 billion. Among these, the default rate so far is less than 15%, indicating that bonds worth $590 billion (747 trillion won) are at risk of becoming non-performing. Non-performing bonds refer to bonds with a yield spread of more than 10 percentage points compared to U.S. Treasury bonds.

Companies that engaged in excessive leverage during the ultra-low interest rate era are now facing bankruptcy risks due to the rapid interest rate hikes worldwide that began last year. Bloomberg pointed out, "As the debt burden accumulated during the ultra-low interest rate era surfaces, a corporate debt tsunami exceeding $500 billion is engulfing the global economy."

Clearit Gottlieb, a major U.S.-based law firm specializing in corporate bankruptcies, predicted that corporate defaults will surge at the fastest pace since the 2008 global financial crisis, excluding the pandemic period. Richard Cooper, a partner attorney at Clearit Gottlieb, stated, "This crisis is showing a different pattern compared to the 2008 financial crisis, the 2016 oil shock, and the 2020 COVID-19 pandemic," adding, "We will see many companies facing default."

According to S&P Global, the size of high-yield bonds and leveraged loans with high credit risk in the U.S. alone surged to $3 trillion (approximately 379.3 billion won) by the end of 2021. This is more than double the amount at the end of 2008. During the same period, junk bond sales in Europe increased by more than 40%. With economic growth slowing and the high-interest-rate environment expected to last longer than anticipated, the debt repayment burden on companies is expected to intensify.

[Image source=AFP Yonhap News]

This year alone, over 120 large companies have filed for bankruptcy in the U.S., indicating a sharp rise in the debt crisis in the Americas. Bloomberg reported, "In the Americas alone, the amount of high credit risk bonds (loans) has surged by more than 360% since 2021," and warned that if this trend continues, a widespread domino effect of bankruptcies similar to the 2008 financial crisis could recur.

Industries such as real estate, healthcare, retail, and software, which significantly increased leverage during the low-interest-rate period, have been identified as the most concerning sectors. Global credit rating agency Moody's forecasts that the default rate for speculative-grade companies, currently at 3.8% (as of the end of June), will rise to 5.1% next year. In the most pessimistic scenario, it could reach 13.7%, exceeding the default rate during the 2008 financial crisis. Carla Matthews, a corporate bankruptcy expert at the UK consulting firm PwC, warned, "The risk of corporate debt becoming non-performing is like a tightly stretched rubber band that could snap at any time," adding, "It will maintain some elasticity but eventually reach a breaking point."