Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Corporate leverage returns to pre-pandemic levels

Stock MarketsSep 20, 2021 11:31
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly/File Photo 2/2

By Yoruk Bahceli

(Reuters) - U.S. and European companies have marked another milestone in their road to recovery from COVID-19, seeing their debt levels relative to profits tumbling to the lowest since before the pandemic erupted in 2020.

Net leverage, an important gauge of a company's financial health, refers to net debt as a proportion of EBITDA - earnings before accounting for interest, taxes, depreciation and amortization.

At U.S. companies rated investment-grade, it fell in the second quarter to the lowest since 2018, according to BNP Paribas (PA:BNPP), while European leverage is the lowest since 2019.

The trend is a good sign for corporate debt markets, where the lowest-rated segments are outperforming this year, signalling normalising credit quality.

"The earnings recovery has been much steeper than what we had initially had in mind, partly because the economy and corporate earnings have become increasingly COVID-immune," said Viktor Hjort, global head of credit strategy at BNP Paribas.

Graphic: Corporate leverage at pre-pandemic levels https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwkmegvo/MsQWu-corporate-leverage-mostly-back-to-pre-pandemic-levels.png

Earnings at S&P 500 and STOXX 600 companies are already some 40% above pre-pandemic levels, according to Refinitiv, with the vast majority of companies beating forecasts.

Leverage has fallen fastest at U.S. firms with "junk" credit ratings, or below the BBB- threshold, where it is nearly at pre-pandemic levels, BNP's data shows.

Kristjan Mae, analyst at asset manager Schroeders, said that while deleveraging at U.S. investment-grade companies was mostly down to strong earnings growth, junk or high-yield firms "have been taking active steps, as is illustrated by negative debt growth".

As of August, U.S. high yield debt was down 1.3% from year-earlier levels, data from BofA shows.

"As some of the lower-rated companies have been under pressure to cut leverage, this is perhaps not a surprising development," Mae wrote in a note.

Graphic: Total U.S. junk debt falls https://fingfx.thomsonreuters.com/gfx/mkt/gkplgwlmavb/quz7m-total-u-s-junk-debt-has-fallen-from-pandemic-peak%20(1).png

BNP Paribas data also shows that quick ratios - effectively an indication of how quickly a borrower can pay off short-term obligations with available liquidity - are well above pre-pandemic levels.

The U.S. quick ratio has dipped slightly from a 10-year high to 95%, but in Europe it is at the highest since 2005 at 84%, possibly due to regional companies' unease about slower economic recovery.

"That speaks of corporates that haven't fully recovered their confidence in the future, that are still acting as if there's a bit of a pandemic going on, or not quite certain that they will have as much access to funding as they did pre-COVID," Hjort said.

Companies worldwide are sitting on some $5.2 trillion in cash, a Janus Henderson report found in July, a result of spending caution and big precautionary borrowings during the pandemic months.

But spending on dividends and capex has increased, meaning cash balances should decline from here. Global capital expenditure is set for the best year since 2007, says S&P Global (NYSE:SPGI), predicting a 13% surge.

But the process is expected to be slower in Europe, which Hjort said could help the region's corporate bonds outperform over the coming months.

Graphic: Corporate liquidity ratios remain elevated https://fingfx.thomsonreuters.com/gfx/mkt/xmvjokgxapr/149O3-corporate-liquidity-ratios-remain-elevated-.png

Corporate leverage returns to pre-pandemic levels
 

Related Articles

Ted Baker Chairman John Barton dies
Ted Baker Chairman John Barton dies By Reuters - Dec 06, 2021

(Reuters) - British fashion chain Ted Baker (LON:TED) on Monday announced the death of Chairman John Barton, and said senior independent director Helena Feltham would take on...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email