Cheap Debt: The Gift that Kept on Giving

Cheap Debt: The Gift that Kept on Giving

Policy makers have held interest rates artificially low since the 2008 financial crisis. This unnatural act – preventing interest rates from finding a natural equilibrium – made it difficult for investors to find yield and equity market valuations ballooned as a result. The cheap debt train has pulled into the station. (See the debt issuance tables at the bottom of this article).

The cheap debt party is over. Credit is drying up. As we wrote in “Let It Bleed“, there is more downside to equities from here. We are taking some pleasure in the cheap debt fallacy coming to an abrupt end:

  • Private Equity firms will hit the pause button as subscription loans and other credit instruments tighten. This will force discipline on PE firms (until the economic recovery comes around in a year or two), encouraging them to add operational value to their portfolio holdings rather than relaying on cheap debt as the primary IRR performance lever.
  • Companies will in large part refrain from repurchasing stock. This scam ran strong for a decade well into 2018 – nosebleed valuations be damned! The trade wars ultimately put a damper on share repurchase activity until COVID-19 doused it in ice water.
    • The share repurchase trend grew especially worrisome over the past decade as many Technology companies relegated Product Development (i.e. “innovation”), to fourth place behind:
      1. Share repurchases;
      2. Dividends;
      3. M&A activity.
    • Far too many companies repurchased stock while named executives sold stock – a conflict of interest if there ever was one.
source: SIFMA Research Quarterly – Q4 2019

The raw data that we have included in this article was originally published in SIFMA’s “Research Quarterly 4Q-19” report published in March 2020. Click HERE to download. Reach us at or with any questions.

Subscribe to CEORater’s YouTube channel for the latest content including the TEK2day Podcast and “CEORater Quick Takes”.