Goldman Presents: “The Good, The Less Good, And The Ugly”

So earlier today, SocGen’s Andrew Lapthorne revisited one of his favorite topics: rising leverage and the extent which equity markets are punishing weak balance sheets while credit markets, notably HY, are not, as evidenced by still tight spreads despite deteriorating fundamentals.

The disconnect between HY corporates’ ability to service their debt and how confident the market seems to be in these same companies is readily apparent in the following chart from the IMF which has been making the rounds since it surfaced earlier this year:

SpreadsICR

 

Well on Thursday evening, Goldman is out with what amounts to a visual tour of global credit markets, both IG and HY.

While Goldman does note that we’ve seen some improvement in North American credit quality since Q1 of last year, relative to the benign landscape that prevailed in 2010, North America stands out as a region where fundamentals have deteriorated materially – especially by comparison to Europe.

Here is the visual breakdown by region and by IG vs. HY…

GSCreditQuality

GSCreditQuality2

And here is some of the accompanying color:

Credit quality is better in Europe. Within developed economies, data through the end of 2016 suggest the joint trajectory of net leverage and interest coverage ratios remains much friendlier in Europe, particularly in the Euro area. Relative to the end of 2010, net leverage, as measured by the net debt to EBITDA ratio, has declined while interest coverage ratios increased for the median Euro area-domiciled non-financial company in both IG and HY. For the median IG UK-domiciled firm, net leverage modestly increased while in HY it moved lower. But in both IG and HY, interest coverage ratios moved markedly higher. Against this friendly backdrop in Europe, fundamentals remain weaker in North America despite the recent signs of improvement since 1Q 2016. Relative to the peak in credit quality reached at the end of 2010, median net leverage ratios remain significantly higher while interest coverage ratios are also lower (Exhibits 2 to 5).

Within EM and in both IG and HY, current median net leverage and interest coverage ratios suggest credit quality is the friendliest among CEEMEA firms and the least friendly in Latam. Median net leverage and interest coverage ratios have also been slowly improving since 2014 across the three regions. But relative to their respective post-crisis peaks in credit quality, the median Latam and to a lesser extent CEEMEA non-financial firms are still significantly worse off.

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