Revenue and EBITDA growth for high yield
bond and senior secured loan issuers slowed
considerably in the first quarter of 2019. These
stats bear monitoring as the year progresses
given the importance fundamental earnings can
have on both credit statistics and, ultimately,
default rates. Weaker EBITDA statistics, in
particular, would result in higher corporate
leverage levels and weaker interest expense
coverage if companies do not proactively
reduce debt outstanding in advance of lower
EBITDA levels. While we think these stats are
not necessarily at worrisome levels today, a few
more quarters of weaker earnings could quickly
cause leverage levels and interest coverage stats
For the high yield market, Q1 revenue and EBITDA trends were the worst since 2016, when the market was negatively impacted by poor earnings from commodity-related issuers. Revenue and earnings growth rates have generally been running in the mid-single digits to low teens, so the slightly negative EBITDA growth rate in Q1 is notable. Leverage levels are at the higher end of their range over the past 10 years, although interest coverage levels are also at the higher end, suggesting that companies have ample cash flow to continue paying their debt service costs.
Statistics for the senior secured loan market are generally similar to those for the high yield market. While EBITDA growth was positive in the loan market in the first quarter, it was nonetheless the slowest quarter since Q1 2017. Revenue growth was the slowest since Q1 2016. Leverage levels remain close to, yet somewhat below, the average of the past 10 years. Combined with strong interest coverage statistics, these measures do not look worrisome today in our opinion.
All data as of June 30, 2019, unless otherwise noted.
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