The leveraging of America: how companies became addicted to debt

The year was 1973 and as the Vietnam war wound down, an oil embargo was threatening the very foundations of the US economy. Petrol stations were running dry and highways began to empty. At Hertz, the car rental company then known for its pioneering computerised booking system, executives realised that transport companies would inevitably be among the first casualties. Hertz’s response? It loaded up on debt.

Within weeks of the embargo starting, Hertz was selling off the gas guzzlers that made up three-quarters of its fleet, and borrowing heavily to replace them with smaller, more efficient cars. The gamble proved wildly successful.

The next year, as an oil price shock ravaged competitors and triggered a bout of “stagflation” as high inflation combined with low growth, Hertz’s revenues and profits hit new records. Soon, the company’s advertising department hired a young athlete named OJ Simpson and proclaimed itself “the superstar in rent-a-car”.

Yet almost half a century later, Hertz is bankrupt, the victim of a coronavirus pandemic that has brought large parts of the global economy to a standstill. The company, which employed 38,000 people last year, and operated from about 12,000 locations, was unable to escape the weight of a $17bn debt pile. The bet that prospered in the 1970s has come unstuck in the 2020s.

Other rental chains have taken out new loans to ride out the drought in travel bookings, but Hertz’s borrowing capacity was already spent: after 15 years of aggressive financial engineering, it owed $12,400 for every car worth $10,000. Much of the money came from complex financial instruments that allowed creditors to demand their cash back when the company could least afford it.

Hertz’s demise has drawn attention to the relentless build-up in corporate debt in the US, where companies now owe a record $10tn — equivalent to 49 per cent of economic output. When other forms of business debt are added in, including to partnerships and small businesses, that already extraordinary figure increases to $17tn.

Even before the pandemic, the level of corporate leverage was beginning to cause alarm. At the end of last year, the IMF issued a striking warning: as much as $19tn of business debt in eight countries led by the US — or 40 per cent of the total — could be vulnerable if there were a “material slowdown” in the economy, a scenario that, if anything, now seems tame.