“Active Re-leveraging”

Ok so this is interesting. One would think, given the experience of the beleaguered US energy complex, that US corporates would be loathe to rack up too much leverage in the post crisis world, especially now that the Fed looks set to finally embark on a hiking cycle.

Apparently however, that’s not the case. Have a look at the following charts from Goldman which show that leverage among US borrowers (HY and IG) is “stubbornly high” and the only thing keeping the situation tenable is higher interest coverage ratios attributable to a low rate environment that may be fading away:

netdebtebitda

activereleveraging

From Goldman: netdebtebitda

Relative to 2015, net leverage ratios for the median IG and HY non-financial firm further rose in the first quarter of 2016 but have since stabilized. Based on our estimates, the median IG and HY companies (ex-Energy and Metals and Mining) have only been more leveraged than today in the early 1990s, the late 1990s and early 2000s following the collapse of the tech bubble and the 2001/2002 recession. Against stubbornly high leverage, median interest coverage ratios remain elevated by historical standards, particularly when benchmarked relative to the late 1990s, a period that saw net leverage ratios increase to similar levels as today (see Exhibit 12). Today’s higher interest coverage ratios can be attributed to the low rate environment that has prevailed since the crisis. That said, they provide a material offset to the negative impact from rising net debt on balance sheets and weak earnings growth. 

 

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