How Sensitive Is Corporate Debt to Swings in Commodity Prices ?

Abstract

Commodity producing corporations have trillions of dollars in outstanding debt. In that context, the bust in commodity prices has raised concerns about the sustainability of this debt and its systemic impacts. But so far the literature lacks estimates of how sensitive is this corporate debt to the swings of a commodity. Our paper separates this commodity effect from other confounding macroeconomic and firm characteristics. Using global bonds from 2003 to 2015 we find that, on average, a 10% change in a commodity's price has a moderate effect on the bond yields of its producers. Yields to maturity change only 15 basis points in the opposite sense; an effect that is only a tenth of the one of commodity stocks. Nonetheless, the sensitivity of bonds is highly heterogeneous. It gets amplified in bonds of shorter maturity; as well as when companies are smaller, more leveraged, less profitable and less hedged. The sensitivity comes mostly from drops in commodities, being 5 times more elastic than average. We also explore different beliefs about the persistence in commodity prices. Transitory commodity changes impact only shorter maturities and firms with high leverage. Longer maturities react more to permanent price changes. Hedged firms are less reactive to both types. In conclusion, finance becomes more costly but it does not dry up with a bust in commodity prices. Consistent with Shiller's (2008) view, hedging limits the amplification of real shocks into financial markets. Our methods are of independent interest for conducting stress-tests.

Keywords: Cost of Debt; Fixed Income Pricing; Commodity; Downgrading

JEL Classification: G32, G12, G01, Q02