- What had been a cash horde has dwindled; cash/debt has fallen a full percentage point over the past year to a below-average level.
- Leverage (debt to EBITDA) rose to 3.64x as debt outpaced earnings for the second quarter on a row. Slower economic growth and fading operating leverage hurt.
- In the high-yield universe, top-line growth has turned negative for the first time since 2002,
- and half the sectors saw margin compression.
- Finally, these companies are reinvesting aggressively in their businesses, with capex budgets rising by 20%. Such expansion augurs further erosion of returns and margin compression.
That deterioration in fundamentals has yet to show up in delinquencies and chargeoffs at banks. They are still close to record lows despite a deceleration in lending, while junk and leveraged-loan default rates are at eight-year lows.
Yet Morgan Stanley bank analyst Betsy Graseck and I agree that corporate credit quality has begun to weaken.
She is expecting chargeoffs to remain flat this year, but loan provisions to rise 30% as falling recoveries spell the end to the long previous improvement in credit quality. For their part, lenders may now back further away from extending credit for buyout deals. In part, that’s because even a slight reduction in market liquidity will make it more difficult for lenders and underwriters efficiently to lay off risk, so lending standards will likely tighten.