Who's Got the Leverage Now?

June 20, 2019

Source: CreditSights – US HY: Leverage by Sector, Credit Tier June 11, 2019 Source: CreditSights – US HY: Leverage by Sector, Credit Tier June 11, 2019

Many economists and media pundits have been highlighting concerns surrounding elevated corporate borrowing. Some have even tried to draw parallels between the elevated American household debt in 2007 and the elevated U.S. corporate debt today. In this week’s chart, I take a closer look into trends in corporate debt over the last five years. 

The chart outlines the relative leverage trends for the different credit quality U.S. High Yield (USHY) issuers. CreditSights sampled nonfinancial USHY issuers and ranked them from highest to lowest leverage. The issuers were then separated into quartiles based on that metric, and tracked to see how each quartile’s leverage has changed over the last five years. 

The results overall show a divergence in trends between the highest-leverage quartile versus the lowest. Over that time period, the most levered USHY corporations continued to increase debt relative to earnings before interest, taxes, depreciation and amortization (EBITDA), and now sit at almost 8x debt/EBITDA. On the other hand, the median of low-quartile issuers moved it down to a comfortable 2.2x today. For context, total leverage for the Barclays U.S. Investment Grade (IG) Corporate Bond Index stands at 3.1x at the end of 1Q19, which is up from 2.5x in 2014.


Key Takeaway

The trends reveal a couple of key insights. First, while USHY issuers are considered “junk” bonds, the top-tier USHY companies actually have less leverage today than the Barclays U.S. IG Corporate Bond Index. I believe the credit quality and value provided by the up-in-quality high yield issuers are attractive. Second, the high quartile group of USHY issuers appears to be drowning in their debt, and leverage has been escalating to unmanageable levels. This is certainly worth keeping an eye on as any negative shift in the credit markets or economic cycle could force some of these issuers into bankruptcy. Third, while the median USHY company’s total debt/EBITDA has modestly increased to 4.2x, that level seems manageable compared with the increase in enterprise value multiples for equity markets. Therefore, I am not concerned with total leverage multiples for USHY issuers as a whole, but have been avoiding the overleveraged lowest credit quality issuers in the market.


Tags: Investment grade debt | EBITDA | U.S. High Yield | Junk bonds

< Go to Chart of the Week

The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications