One of America’s most iconic companies just took its last breath…

After several troubling years, Toys “R” Us – once the world’s largest toy retailer – finally succumbed to the weight of its massive $5 billion in debt. Last month, a federal judge ordered the company to liquidate its assets – including every toy on every shelf – to pay back whatever debt it could. A months-long process ended with the company shuttering its remaining stores across the U.S. in June.

It marked a sad ending to a once-great company.

The Toys “R” Us bankruptcy might not matter much to you.

You might think it’s just another outdated “brick and mortar” retailer that never completely adapted to the Internet age.

It’s much more important than that, though… It’s not a one-time event.

Toys “R” Us will be the first in the biggest wave of corporate bankruptcies in American history.

Of course, this wave will lead to a massive decline in the stock market.

But you don’t have to be a victim…

First, you need to understand how we got to this point…

Since the last financial crisis, American companies have binged on debt.

Over the past decade, they’ve taken advantage of the Federal Reserve’s artificially low interest rates to borrow more than $12 trillion altogether. Today, companies have borrowed more money as a share of the economy than at any other time in U.S. history.

Like children with a giant bag of candy, many companies didn’t know when to stop… In the past several years, they continued borrowing and borrowing – assuming interest rates would always stay low and that the American economy would remain healthy forever.

The total debt of these companies has now grown to unsustainable levels. And as a result of two factors converging in the market today, the “day of reckoning” will soon arrive…

  1. These debts are now starting to come due. A tidal wave of this corporate debt – a record $4 trillion – must be paid or refinanced over the next five years. And…
  2. Interest rates are rising… quickly. Companies that can barely afford to maintain their debts today – at artificially low rates – will collapse as rates go higher.

Many companies won’t be able to refinance their debt coming due in the years ahead. Just like Toys “R” Us, a company that no one expected to go out of business at this time last year, their equity will suddenly become worthless. This is just the start…

You see, Toys “R” Us was simply one of the first companies to try to refinance its massive debt load in what Wall Street billionaire and current U.S. Secretary of Commerce Wilbur Ross calls a “wall of maturities” starting in 2018 and building up through 2021 and 2022.

Never before has this much debt come due in such a short span of time.

When the crisis unfolds, things will be much worse this time…

Back in 2007, just before the last financial crisis, close to 6% of the largest companies in America weren’t earning enough to even cover the interest payments on their debts. Today, according to a study from Bianco Research, that number is an alarming 15%. In other words, almost three times as many companies can’t cover even the interest on their debts.

Want more proof? Take a look at this chart…

As you can see, corporate debt as a percentage of U.S. gross domestic product is higher than ever. Yet defaults remain near a 20-year low. This situation simply can’t last. Even a top analyst at S&P Global Ratings says something has to give.

Meanwhile, interest rates are heading higher… much higher. Through June, the Fed has already raised interest rates twice in 2018 and plans to do so twice more this year. It recently increased the “federal funds rate” – the rate that banks charge each other – to 2%.

All interest rates in the U.S. are tied to this rate – including the interest rate on the 10-year U.S. Treasury note, which has trended higher for the past couple of years. In May, it briefly broke past 3% – a key level that implies grave danger for the most-indebted firms…

As this figure rises, companies’ borrowing costs rise, too. They’ll have to pay more – and some will have to pay significantly more – to refinance their debt. As companies plunge into the wall of maturities, hundreds simply won’t be able to afford these higher rates… They’ll go bankrupt when the burden of their interest costs suddenly becomes too heavy.

Many won’t even get the chance… Creditors won’t be willing to lend them new money at the higher interest rates. That will force these companies into bankruptcy, as well.

And yet, despite all of these troubling facts, both the stock market and corporate-bond market have barely reacted… Both have been in “bull markets” for years.

In fact, the current bull market in stocks has been driven almost entirely by these companies borrowing money they can’t afford to repay. Most investors don’t understand how big of a role new debt has played in the equity boom that we’ve seen since the last crisis.

As a result, the coming wave of bankruptcies will surprise most investors… It will lead to the biggest disaster since the last financial crisis. Remember, stock prices plunged 50% in the ensuing bear market, which led to a national bailout of the banking system.

Now, with the Fed aggressively raising interest rates for the first time since before the last financial crisis… and with a record tidal wave of maturities about to hit… a similar scenario will soon play out across dozens of the biggest and most respected companies in America. Only this time… because of the buildup of massive amounts of debt, the losses for investors will be much larger.

Good investing,

Mike DiBiase

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Source: Daily Wealth