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US Leveraged Loan Issuers See Earnings Boom

EBITDA growth

New tax policy delivered the expected jolt to bottom-line results in the first quarter, but this was no sugar high for U.S. leveraged loan issuers, as core quarterly earnings growth bulked up to the best result in three years. The rising tide of EBITDA also bolstered key credit metrics, as this protracted credit cycle shows no signs of early-onset weakening in the broad view.

For S&P/LSTA Leveraged Loan Index issuers, EBITDA growth mounted to 9.25% in the first quarter, up from 5% in the fourth quarter and a flattish result in the first quarter last year, according to LCD. Growth in the first quarter was the strongest since readings were 9–10% over the last three quarters of 2014.

The results reflected 12% top-line revenue growth for the quarter, also a high-water result since 2014. The quarterly average from 2015–2017 was roughly four percentage points lower.

The jump in earnings comes at an important time for loan issuers, as LIBOR, the rate on which leveraged loans are based, has been rising steadily since 2017’s first half, from 1.3% last July to 2.33% at the most-recent month-end. That rise in LIBOR means a higher cost of funds for borrowers. That, in turn, could eat into a company’s interest coverage ratio, which indicates a borrower’s ability to service debt.

Interest coverage at the end of 2017 was at 10-year highs, according to LCD, and his remained roughly at that level – despite the significant rise in LIBOR – due to the boost to EBITDA, analysts say. – Staff reports

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