Quantitative Easing during the last eight years may have helped stimulate economic growth, but several businesses took it too far…risking their own solvency for the sake of expansion.
- Many businesses did not deleverage during this period of cheap money; instead, they increased their imbalances.
- Corporate debt to EBITDA—earnings before interest, taxes, depreciation and amortization—has reached sky-high levels.
- Approximately 20% of US corporations are facing default in the event of rising interest rates.
- There are more “zombie companies”—businesses unable to pay interest expenses with current operating profit—now than there were before the 2008 financial crisis.
Bankruptcies plagued the renewable energy sector even during the QE period…what will happen now that the QE era has come to an end?
- In principle, disruptive technologies shouldn’t’ be more leveraged than traditional technologies; that’s not what happened.
- Basing a business on subsidies + higher prices + massive debt = suicide.
- Many business used subsidies and debt to grow for the sake of growing, not necessarily because there was sufficient market demand for their products—a case of malinvestment.
Several businesses in the renewable energy sector found themselves having to increase debt to pay debt—an impossible position wherein their returns can never exceed their capital costs.
- The failure of SolarWorld, ET Solar, American Solar, SunEdison, Sungevity, Suniva, Beamreach, Verengo Solar and others are attributable to a bubble-type business model that many companies in this sector are still using.
- In principle, efficient companies do not need subsidies; and the most generous subsidies cannot save inefficient companies.
- Overall, “the global renewable sector faces refinancing needs in the next seven to eight years that exceed its entire market capitalization.”
The main point is this: Winter is here…and the next Enron-style collapse is about to hit not one company, but numerous companies across this entire sector.
Read the original source at Mises.org
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