"Underperform the debt"

Question

What, if anything, should financial risk managers of banks and other corporate entities be thinking and doing right now? Will such businesses suffer in a world of persistent, unbridled inflation?

As it happens, corporations are, relative to pensioners, fairly immune to inflation. The corporate structure itself is a natural hedge. Debt liabilities will lose value during inflationary years, and that's good for the debt issuers.

To the extent that a corporate's balance sheet holds a mix of financial and non-financial assets, the fall in asset value may match or be less than the drop in debt value. Further unlike the pensioners' fixed revenue, both the revenue and the expenses of businesses tend to "float" with inflation.

Professional risk managers, therefore, need not dread the onset of inflation. The corporate risk challenge is deflation! In deflation, the debt liabilities gain value. The assets of a non-financial corporate will likely "underperform the debt" in terms of the reaction to inflation.

While banks own predominantly financial assets that nominally appreciate during deflation, the corporate loans among such assets will fall in credit quality. In addition, the "floating" aspect of income statement expenses can be sticky on the deflationary side. For example, societies tend not to accept workers' wage reductions as a reasonable consequence of deflation.

Monetary Policy Risk? Deflation! By J.M. Pimbley [source]

I have no difficulty in understanding the whole article except for the bold sentence.

When I look up underperform in the dictionaries, they all say it's an intransitive verb. But it's being used as a transitive verb here. What makes this usage justifiable here? What is the purpose of the quotation marks?

Then I remember some action verbs can act as both transitive and intransitive. Take break for example, we can say the bottle broke just now and he broke the bottle just now. I would think it's similar here. Does the sentence mean the assets make the debt underperform - or, to put it another way, the value change of the assets outstrips that of the debt? Is my understanding right?

Answer 1

The assets of a non-financial corporate will likely "underperform the debt" in terms of the reaction to inflation.

Does the sentence mean the assets make the debt underperform - or, to put it another way, the value change of the assets outstrips that of the debt? Is my understanding right?

No.

There's no causal relationship between the debt and assets; it's the inflation which makes both of them change in value. They're simply measured at the same time and compared, though they will likely be strongly correlated, as they share a cause.

The debt's reaction to the inflation will be of greater magnitude than the assets', as opposed to the other way around. As specified earlier, both debt and assets lose value when exposed to inflation. The final clause, in terms of the reaction to inflation, tells us that what's "performing" is the size of the decline in value. Thus, the assets will underperform the debt means the lost amount of debt will be greater than the lost amount of assets.

This is beneficial because debt is money owed, which lowers the net worth of a business. So if the size of the debt drops more than the size of the assets, then the net worth will increase. A very simple example:

Debt  Assets  Net Worth
50    100     50

Say inflation causes assets to devalue by 1% and debt by 4%....

Debt  Assets  Net Worth
48    99      51

When I look up underperform in the dictionaries, they all say it's an intransitive verb. But it's being used as a transitive verb here. What makes this usage justifiable here?

MW contains a transitive definition. I believe (though I'm not going to bother to research, as it'd be a lengthy undertaking for me) that the transitive usage is relatively new, and a little more technical than the intransitive version. I've seen this often enough for it to be standard (though not common) in American business English, especially in a financial or investing context (as used here).

What is the purpose of the quotation marks?

They emphasize that the usage isn't standard. One doesn't typically think of debt in terms of "performing", and the same goes for the strength of a reaction. Also, underperforming is usually a bad thing, but in this case, the underperformance of the assets is beneficial. The quotation marks essentially say hey, this language is a little weird, but run with me on it; you see what I mean, right?