Corporate Debt Binge Will Ebb, Moody’s Predicts

Earnings slowdown expected to propel a movement away from heavy borrowing.

US companies’ gluttonous feast on debt may be coming to an end, according to Moody’s Analytics.

And what a meal it has been: In the first quarter, nonfinancial corporate debt climbed 8.1%, year over year, to $9.926 trillion, Moody’s noted. This is a new record.

The reason that Moody’s gives for this trend to ebb: Earnings and sales are on the downswing. A Moody’s research report cited early June’s Blue Chip consensus of business economists’ projection for only a 2.7% rise in nonfinancial corporations’ core pretax profits in 2019.

That’s about one-tenth of their level in 2018. Meanwhile, sales growth has slowed to 2.3% in the January-April period this year, compared to 5.8% in the year-ago period.

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“Downwardly revised predictions for corporate earnings,” wrote John Lonski, chief economist of Moody’s Capital Markets Research, “may encourage more companies to deleverage balance sheets, or at least slow the growth of their debt obligations relative to both prospective sales and cash flows. In turn, the annual growth rate of nonfinancial corporate debt might be expected to slow considerably from first quarter 2019’s 8.1%.”

Already, a borrowing deceleration is showing up in bank loans to companies. In the first quarter, they increased 10.1%, but in April that slowed to 7.6%. Bond issuance still appears to be on the upswing, for now.

Lonski pointed to the likelihood that interest rates should, at some point, begin to rise, which could further choke off debt demand from companies. With the Federal Reserve seemingly poised to trim its benchmark short-term rate, that may not be imminent. But that was the way things were trending before fears sparked by the trade war put the upward bias on rates on hold for the moment.

Surely, the low rates that have stoked the corporate appetite for debt will not persist forever.

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LACERA Board Sacks CEO Lou Lazatin

Fund launches executive search immediately, putting Chief Counsel Steven Rice in charge for now.

When Lou Lazatin joined the Los Angeles County Employees Retirement Association (LACERA) as its chief executive officer in November, she had no idea her tenure would only last eight months.

The $54 billion fund fired her earlier this month after its board put Lazatin on administrative leave on May 31. 

The pension plan has since launched a nationwide CEO search, placing Chief Counsel Steven Rice as its interim head. Rice, who confirmed the board’s actions with CIO, declined comment on why Lazatin was ousted as the fund’s policy bans staff from commenting on such matters.

Lazatin became CEO in November, replacing Robert R. Hill, the temporary chief during the Los Angeles fund’s hunt for Gregg Rademacher’s successor. Rademacher retired in October 2017. Hill went back to his role as assistant executive officer after Lazatin’s appointment to help with the transition.

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This was Lazatin’s first stint at a public pension fund during her executive career. According to the ex-head’s LinkedIn profile, her C-suite run was previously confined to the health care industry. She last was CEO at Shriner’s Hospitals for Children of Southern California, and earlier spent eight years as president and chief of Saint John’s Health Center, where she had also reportedly been fired, according to the Los Angeles Times.

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