Corporate Bonds’ Rattled Ratio Rationale
With public and private research on corporate external debt increasingly warning of fundamental deterioration accompanying its post-crisis doubling to $1.25 trillion equivalent to the US high-yield market, sell-side houses have countered with leverage and profitability findings of “tentative stability” as in a recent JP Morgan piece. It acknowledged weakness in hundreds of non-financial credits with GDP growth stuck at 4-5 percent, but noted earnings margins at 20 percent and low interest coverage for only one-fifth of speculative borrowers. Among categories quasi-sovereigns and Asian miners have the poorest measures although Chinese property companies with their own distinctive features are excluded from the mix. Although interest rates may rise in the second half, 2014 refinancing will be $100 billion less than last year and the negative ratings trend may have bottomed with these offsetting factors. Average leverage exceeds the previous 2009 peak at 1.7 times but is in line with the “overall cycle,” the bank argues. Governments in Brazil and China have been major causes as they deploy commodity firm balance sheets for policy objectives, with Petrobas’ 5x leverage a particular outlier. By region Asia and Latin America are at 3x, while Europe and the Middle East-Africa have half that ratio, with the latter due to Dubai’s post-restructuring experience. That geography also has the highest profitability at 35 percent and interest coverage, which stands over 4x for EM high-yield generally or twice the danger zone. Consumer and metals companies are most at risk with names in Argentina and Mexico among the worst performers. A separate examination of Chinese real estate developers emphasizes liquidity metrics like cash balance/short-term debt, and points out that strong ones have available funding to gain share under the “small likelihood” of housing price collapse. In a developed market comparison, leverage lags at the same ratings range while US investment-grade profitability has pulled ahead. The juxtaposition may however be misleading for issuers from Argentina and Ukraine which have decent ratios but are constrained by the sovereign near-default ceiling. Nationalized oil producer YPF has managed to place global bonds notwithstanding the twists in the holdout saga which reached a legal climax with the Supreme Court refusing to hear an appeal of the $1.5 billion New York award to two funds. Spain’s Repsol was compensated with $5 billion in bonds for the expropriation, and President Fernandez in a last-ditch about-face will negotiate directly for a compromise which may include a combination of cash and paper. Her cabinet originally vowed to reroute payments through Buenos Aires after the decision, but existing US holders and agents would violate the law if they supported the strategy.
Ukraine’s new President Poroshenko proclaimed a unilateral cease-fire in the restive pro-Russian East as industrial names outside the gas and phone monopolies kept their investor base on hopes that EU partnership and global agricultural demand would boost business. Banks on the other hand are undergoing thorough audits under the restored IMF program as lenders in the rebel regions have been unable to restore service.
