Downshifting profit growth in 2016 reached stall speed for leveraged loan issuers early this year, putting pressure on credit metrics at a time when market participants are increasingly alert to signals of a developing negative inflection for the credit cycle.
First-quarter earnings for S&P/LSTA Leveraged Loan Index issuers that publicly file financial results revealed the first negative year-on-year aggregate reading for EBITDA since recession dynamics settled over the global economy during the first half of 2009, according to LCD.
The first-quarter results were far from uniformly doom-and-gloom, however, as the negative 1.25% reading for 1Q EBITDA was net of noisy and wide-ranging results, by sector basket.
Even so, the readings were slightly negative on net (negative 1%) when stripping out volatile oil and gas inputs from the sample, and included more dour results from retail and media credits, where distress ratios have disproportionately climbed over the last year ($$).
High-level commentary from speakers at the Milken Institute Global Conference earlier this month generally keyed on the notion that profit growth—while below the heights recorded during the recovery period over the first half of this decade—would likely prove resilient over the quarters ahead, given relative strength in credit metrics now, versus at the same point in prior credit cycles, bolstered by still-accommodative—if tightening—monetary policy.
Indeed, S&P Global’s Bob Keiser notes that corporate America writ large posted a smart 15% year-to-year increase in first-quarter earnings across the S&P 500, and projections suggest continued growth into 2018. But this sample prominently includes results from oil-and-gas players, many of which reported big year-to-year improvements on the bottom line in 1Q17 amid more stable commodity-price progressions, relative to the desperately weak comparisons from 1Q16.
When stepping back from the oil story, the slip in profits to start 2017 extends a bright-line trend for loan issuers. The negative first-quarter print across the S&P/LSTA Index, compared with 7.1% growth in the first quarter of last year and 4–6% growth rates over the last three quarters of 2016, marks a steady deceleration from quarter averages of 7% in 2015, 9% in 2014, and 13% over the recovery period from 2010–2013.
Flow-of-funds analysis ($$) by S&P Global for the concluding quarter of 2016 had already showcased a glaring jump in the financing gap for U.S. companies (the difference between capital spending and what is covered by internal cash generation), as a nascent uptick in capital spending—in part due to O&G credits increasing their outlays as commodity prices stabilized—dovetailed with tumbling profit growth.
A high financing gap is unsustainable without a pullback in spending or a substantial increase in borrowing, which may put leverage trends for some of the more at-risk loan issuers under a harsh spotlight in a low- or negative-growth environment for earnings. Indeed, issuers with “outer-edge” debt/EBITDA ratios of greater than 7x swelled to 22.56% of the sample in the latest quarter, up more than four percentage points from 4Q16 and versus 21.15% a year earlier, marking the highest proportion since 4Q14. – John Atkins
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This story is taken from analysis which first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.