Desirability was responsible for debt’s prominent place in corporate finance. Not long ago, companies were piling on to debt and its variants. As mega projects and monstrous ambitions needed wings, industrialists pined for debt, long-term and short-term, from commercial banks and development financial institutions. In the bargain, debt jugglery led to higher on-paper returns for shareholders. As is their jargonising wont, companies called this financial acrobatics ‘trading on equity.’

This romantic attitude towards debt is changing now. Post-pandemic, companies are aghast to see their cash flows drying up. As interest rates soar and economies freeze in winters of growth, companies are struggling to service their debts. They are gasping under the burden of bloated debt. Mounting inventories, deserting customers, dipping footfalls and retreating revenues are hurting corporate bottom lines.

Acquiring Debt Immunisation

To prevent matters from getting worse, Covid-hit companies are prepared to do anything today to survive. From selling divisions to stripping assets to divesting stakes, they are ready for anything in the struggle for survival and staying afloat. Downsizing is in and corporate restructuring has become the new buzzword. As companies and societies turn introvert and de-globalisation becomes the new norm, debt is aspiring for a change. Debt resilience is the new corporate goal today. Staving off bankruptcies is top priority now.

Struggling companies are prepared to go any length to acquire debt immunity. As Covid left many indebted companies with slow-moving products brittle, these companies have become utterly vulnerable today. They are ready to break at the smallest downturn. The fear of going broke at the slightest hit is making them morbidly fearful of debt.

This dread is making debt-laden companies alter the way they look at corporate finance. They are junking their old-era preference for debt. Before Covid, cheap borrowings might have helped them churn princely profits and trigger cycles of super profits. But, borrowings are turning today into shots of cyanide.

Deathly Debt Overhangs

With the end of the golden era of glorious debt, debt-riddled companies are trying hard to stave off sinking into a recessionary quagmire. Reckless borrowing was pleasant when the going was good. With low interest rates and recession nowhere to be seen, debts were desserts to indulge in.

These debts have become neck-breaking albatrosses today. Sadly, deathly debt-overhangs could throw viable companies into the deep end of bankruptcy. Consider, as many as 139 US retailers filed for bankruptcy between 2015 and 2022. This includes biggies like Sears, JCPenney, Neiman Marcus and Revlon.

What is the way out for these deep-into-debt companies? Many of them are going in for drastic restructuring to acquire resilience. As bankruptcy courts crack under the weight of claims and counterclaims, as insolvency codes prove inefficient to handle mountainous volumes of claims, counterclaims and novel variants, corporate delinquency is set to rise making out-of-court settlements complex, difficult and rare.

As bystanders, governments and their central banks are left helpless. They can only toy with the idea of bailing out the corporate sector by favouring equity infusions over loan guarantees. Alongside, companies down in the dumps are dissolving divisions, downsizing drastically, selling assets and doing whatever they can to retire expensive debts. With so much debt on books, where is the time and inclination for research?

National Debt Restructuring

With investments in innovation ruled out, corporate recovery will get delayed further. Unable to wait for a long-drawn recovery, corporate players will gradually move towards equity. Debt will be out and equity will be in. In such a scenario, governments and public sector companies will be the sole borrowing groups in the market. With their hunger for unlimited finance for colossal and populist infrastructure projects, governments will lap up debt.

As more and more companies bite the dust of debt, they will impact their nations’ recession-hit economies. Groaning under huge public debts, these economies will not be able to handle mounting defaults and massive bankruptcies. Yesterday, it was Greece. Today, it is Sri Lanka. In default now are Lebanon, Russia, Suriname and Zambia.

Bankruptcy-vulnerable and at risk now are Argentina, Belarus, Ecuador, Egypt, El Salvador, Ethiopia, Ghana, Kenya, Nigeria, Pakistan, Tunisia and Ukraine. Rightly, it is high time these nations restructured their debts and explored new avenues for raising finance.

Beauty of Social Bonds

The adventurous governments, among the above, will discover the beauty of social bonds which enable channelisation of private capital for public good. As these social bonds are generally meant for social causes, they can play a major role in post-pandemic reconstruction in many of the above economies. Look at this theory anyway, social bonds will be on a speedy rise in times to come.

This ‘socialisation’ of debt will help governments to acquire immunity against Covid-induced shocks. Proceeds of social bonds may be leveraged to subsidise life-saving drugs and virus vaccines, besides funding reconstruction of their recession-hit economies. These proceeds could be used by governments to rehabilitate socially-relevant companies hit by bankruptcies in the non-financial Environmental-Social-and-Governance (ESG) sectors.

Thus, social bonds may probably become the new norm in government finances tomorrow. They may play such salubrious social roles, companies in the private sector could fall in love with them in due course. This may end the State monopoly over issuing social bonds.

Special Purpose Social Bonds

Why, there could be region-specific or project-specific social bonds over time, setting de-globalisation in motion. Social bonds, styled as Corridor Bonds, may be issued to finance the completion of Delhi-Mumbai Industrial Corridor project.

Social bonds, packaged as Belt Bonds, may finance the Belt and Road Initiative, China’s regional infrastructure project. This project is expected to bring economic prosperity to regions from Pakistan to China and trillions of dollars for infrastructure investments along and around the Old Silk Road. This project is slated for completion in 2049.

In Conclusion

Considering the positive impact these projects will have, private and public sector investors, besides ESG-conscious individuals and funds, will begin subscribing to these social bonds. As post-pandemic recovery gathers further momentum, large-scale participation in social bonds will socialise debt, altering social attitudes towards debt. Soon, we may find large chunks of debt on national balance sheets and not on corporate financial statements.