Broadly speaking, there are two main types of corporate debt – loans and bonds. Loans are where a company borrows an agreed amount of money from a bank (or other financial institution), with an agreed interest rate payable until the loan is fully repaid. In this sense corporate loans operate fundamentally the same as consumer loans. Importantly, loans cannot be openly traded on financial markets. Bonds, on the other hand, can be thought of as a promise repay a fixed amount of money on a certain date that is sold to investors. Once issued by a company, bonds can then be openly traded on financial markets. The date for repayment is called the maturity date, with the company making regular interest payments to whoever holds the bond until then. Generally, the interest rate is lower for bonds than loans. While bonds are the most common financing instrument in the United States, in China and the Euro area, the overwhelming majority of corporate debt is in the form of loans. Loans also comprise most of the credit issued from wealthier countries to companies in developing economies – although external debt remains a small portion of the total corporate debt in emerging markets.
One common point of concern for many analysts is the apparent decline in quality of corporate debt in several key markets. Since 2009, the share of debt rated as “speculative” – that is, as a relatively risky investment – has increased in both China and the United States. However, this trend is market dependent, as the quality of Japanese, French and German corporate debt has actually improved over this period. Another cause for concern cited by some analysts is changes in the ratios between company earnings and debt levels. Similar to the quality of corporate debt, the amount of debt held by companies whose earnings are below their interest repayments has been increasing in the United States but falling in many other developed markets. However, when this ratio is considered in terms of total debt to surplus earnings (i.e. after wages), companies in all major developed economies have become increasingly leveraged since 2015.