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Earnings Growth at US Leveraged Loan Issuers Soars (Along with Interest Coverage)

Market pros see leveraged loan default rate holding at low levels

S&P: BBB downgrade risks in Europe look manageable

As specter of rate cuts grows, investors retreat from leveraged loan asset class

Retail investors flock to US high yield bond funds with $1.8B inflow

Earnings Growth at US Leveraged Loan Issuers Soars (Along with Interest Coverage)

EBITDA growth
Issuers in the risky U.S. leveraged loan segment during the second quarter posted their strongest earnings growth since the early days of the current long-running credit cycle, according to LCD.

The haughty numbers puts these borrowers in a better position to service outstanding debt, a key concern of those worried about a spike in corporate defaults.

Revenue for issuers in the S&P/LSTA Leveraged Loan Index swelled 14% in the second quarter, and core EBITDA growth was 12% (compared with 2Q17). Averages over the last five years are 10% at the top line and 7% for EBITDA, and there haven’t been higher quarterly growth results since 2014 and 2012, respectively.

As notable, the strong earnings boosted interest coverage – a company’s ability to pay interest costs on outstanding debt – to its highest level since 2001, according to LCD.

Leveraged loan market watchers have for some time been worried about loosening credit structures and covenant-lite loans, saying that a downturn in the economy could hit these borrowers especially hard, due to their relatively high amount of debt, though the boost in earnings could alleviate some of the concern, in the short term at least.

More broadly, the growth tallies for corporate America were even loftier when following the line from tax policy to the headline earnings-per-share results. Overall EPS for S&P 500 companies grew 25% in the second quarter, and growth is projected to continue near 20% over the back half of 2018, before moderating against the much tougher comparisons next year. The EPS results and growth projections are running about twice what they were before tax legislation was passed late last year. – Staff reports

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