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Corporate leverage returns to pre-pandemic levels

UK economy grows 0.6% in Sept after weak summer - ONS
UK economy grows 0.6% in Sept after weak summer - ONS   -   Copyright  Thomson Reuters 2021   -  
By Reuters

<div> <p>By Yoruk Bahceli</p> <p> – U.S. and European companies have marked another milestone in their road to recovery from <span class="caps">COVID</span>-19, seeing their debt levels relative to profits tumbling to the lowest since before the pandemic erupted in 2020.</p> <p>Net leverage, an important gauge of a company’s financial health, refers to net debt as a proportion of <span class="caps">EBITDA</span> – earnings before accounting for interest, taxes, depreciation and amortization. </p> <p>At U.S. companies rated investment-grade, it fell in the second quarter to the lowest since 2018, according to <span class="caps">BNP</span> Paribas, while European leverage is the lowest since 2019.</p> <p>The trend is a good sign for corporate debt markets, where the lowest-rated segments are outperforming this year, signalling normalising credit quality. </p> <p>“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 <span class="caps">COVID</span>-immune,” said Viktor Hjort, global head of credit strategy at <span class="caps">BNP</span> Paribas.</p> <p/> <p>Graphic: Corporate leverage at pre-pandemic levels https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwkmegvo/MsQWu-corporate-leverage-mostly-back-to-pre-pandemic-levels.png</p> <p/> <p>Earnings at S&P 500 and <span class="caps">STOXX</span> 600 companies are already some 40% above pre-pandemic levels, according to Refinitiv, with the vast majority of companies beating forecasts. </p> <p>Leverage has fallen fastest at U.S. firms with “junk” credit ratings, or below the <span class="caps">BBB</span>- threshold, where it is nearly at pre-pandemic levels, <span class="caps">BNP</span>’s data shows. </p> <p>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”.</p> <p>As of August, U.S. high yield debt was down 1.3% from year-earlier levels, data from BofA shows. </p> <p>“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. </p> <p/> <p>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</p> <p/> <p><span class="caps">BNP</span> 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. </p> <p>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. </p> <p>“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-<span class="caps">COVID</span>,” Hjort said. </p> <p>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.</p> <p>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, predicting a 13% surge. </p> <p>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.</p> <p/> <p>Graphic: Corporate liquidity ratios remain elevated https://fingfx.thomsonreuters.com/gfx/mkt/xmvjokgxapr/149O3-corporate-liquidity-ratios-remain-elevated-.png</p> <p/> </div>