Billionaire venture capitalist Chamath Palihapitiya says that a looming credit crisis could burn a hole worth trillions of dollars in corporate America’s pockets.
Last month, Palihapitiya warned that many of America’s largest firms are about to hit a massive wall of debt and the bills will come due by January 2024.
In a new episode of the All-In Podcast, the venture capitalist says that the rapid rise in interest rates over the past year is putting a lot of pressure on companies that heavily borrowed during the height of the pandemic when interest rates were close to 0%.
According to Palihapitiya, a bunch of over-levered firms in the real estate and private equity sectors will likely need to be rescued as the immense amount of debt could put them in a precarious situation.
“There is a looming credit crisis in the United States… The debt wall that Corporate America is about to hit is pretty meaningful… A lot of these companies will have to thread the needle because if rates don’t go down materially in the next 18 to 24 months, these folks are going to be paying rates that they cannot bear.
And they’ll probably go in to still breach a covenant of some of the debt. One thing that’s important here is that there are some very strict guidelines and covenants that debt issuers sign up for, and one of them is how much debt can I have as a percentage and/or as a multiple of my EBITDA (earnings before interest, taxes, depreciation and amortization). So that’s a way bondholders govern the risk that you don’t overborrow.
Now the problem is if you have an earnings recession and/or rates go up, you can get one of these two things to go wrong and all of a sudden, now you have seven or eight times your EBITDA, and you’re in a very, very bad state…
I think there is a whole portfolio of over-levered companies in real estate and there’s a whole portfolio of over-levered companies in private equity. Those folks will have to get recapped and that will probably cost trillions of capital impairment, but I do think that that can relatively be done without impairing the economy at large.”
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