Will Indebted Consumers Hasten the Next Distressed Corporate Debt Cycle?

 NOTE: This blog piece is created by the Acuris Studios team, the custom events and publications arm of Acuris. Opinions and views expressed in this article are that of the author. Join us at the Debtwire Investors Summit, where industry experts will discuss more in-depth distressed debt and restructuring dynamics for the year ahead. 

The historic, and growing, amount of leverage the average U.S. household and individual is taking on is no secret. What is startling is the number associated with that debt. According to a study published in March by personal finance website WalletHub, consumers’ current total credit card debt exceeded USD 1trn for the first time in history.

“At small banks, the share of outstanding card balances written off as a loss after consumers failed to pay hit 7.2% in the fourth quarter of 2017, up from 4.5% a year ago,” states a report by Tematica Research, a firm that provides research for RIAs. “While overall card losses across all banks remain below the historical average of the last 30 years, they’ve been slowly climbing in the last two years. We believe these smaller banks are canaries in the coal mine as the average charge-off rate at those smaller banks is near an eight-year high, while the 3.5% loss rate at large banks remains well below the 10.6% seen in 2010.”

The authors of the report went on to note that out of nearly USD 1.38trn in student debt, 11% of borrowers are 90 days or more delinquent.

With the costs of college continually climbing, students are not only graduating with excessive debt, but even more daunting, are receiving inflation-adjusted wages comparable to baby boomers when they were young. Baby boomers were able to enter their 20s with little debt which helped them buy a house and start a family at a young age. Earlier generations used compound interest in their favor while millennials have been buried by it. On March 11, the Federal Reserve released a report stating that 1 in 4 US-based jobs are in a low-wage occupation, which means that at the median salary, these jobs pay below the poverty threshold for a family of four.

You can see where this is going…

Our cash-strapped consumer, whether a fresh college grad or head of household, has huge implications for the overall economy, but especially the automotive and home builder sectors, as such purchases will be postponed to pay down debt.

To compound problems, between the impact of ridesharing services like Uber and Lyft, and the growth of electric cars that require a fraction of the parts needed in traditional vehicles, the automotive industry is coming under pressure from these secular headwinds. From auto rental companies to auto parts makers, distress is already starting to spread.

The brick-and-mortar retail industry, which is not only losing market share to its online peers and marketing to overleveraged customers, but is also staring at a USD 1.9bn wall of high yield borrowings that is set to mature this year, according to Fitch Ratings. On an average annual basis USD 5bn will mature each year between 2019 to 2025. Will revenues and credit market conditions put retailers in a position to refinance this debt load?

I look forward to the conversation at Debtwire’s annual Investors’ Summit on April 25 in NYC where panelists, many of whom are notable distressed debt investors, will touch on how the overleveraged consumer will be a drag on small regional banks, retail businesses, the automotive industry, home builders and corresponding mortgage lenders. If you’re interested, please join me there!