The new U.S. federal tax policy delivered the expected jolt to bottom-line results in the first quarter, but this was no sugar high for loan issuers, as core quarterly earnings growth bulked up to the best result in three years. The rising tide of EBITDA also bolstered key credit metrics, as this protracted credit cycle shows no signs of early-onset weakening in the broad view.

For S&P/LSTA Leveraged Loan Index issuers, EBITDA growth mounted to 9.25% in the first quarter, up from 5% in the fourth quarter of 2017 and a flattish result in the first quarter last year, according to LCD. Growth in the first quarter was the strongest since readings were 9% to 10% over the last three quarters of 2014.
The results reflected 12% top-line revenue growth for the quarter, also a high-water result since 2014. The quarterly average from 2015 to 2017 was roughly 4 percentage points lower.
Following dramatic variances in 2015 and 2016, the overall EBITDA results and those stripping out the previously volatile oil & gas-related inputs were closely aligned for a fifth straight quarter, against the backdrop of firming energy prices. Indeed, year-to-year gains were broad-based across sector baskets, with the exception of some soft aggregate results from publishers, and flat outcomes for the healthcare and metals & minerals constituents.

And, under tough scrutiny, retailers (non–food and drug) posted solid earnings growth against some notably milquetoast comps, both year over year and sequentially. While no one is calling for a glorious renaissance for traditional and specialty retailers amid shifting competitive dynamics, sentiment is moving in the direction of identifying the more agile survivors. The average bid price for loans in the retail sector within the S&P/LSTA Leveraged Loan Index has been on either side of 90.5 in the second quarter so far, down about 4 points from the 2016 heights, but still marking an improvement of nearly 2 points from average over the back half of 2017, including a low near 87.5 last September.
That mid-range reading for retail loan bids comports with a cautious outlook. S&P Global Ratings this month noted that rising oil and gasoline prices are a headwind for consumer spending, under a rule of thumb that every 1-cent increase in gas prices at the pump leads to a $1 billion (annualized) reduction in consumer spending. "We wouldn't be surprised if gas prices were 50 cents higher since the start of the year by the beginning of summer. That would mean more than a third of the stimulus from tax cuts to households would be offset by increased gas prices," the rating agency stated in a report published May 18. "And at $3 per gallon, gasoline prices may start to have a material psychological impact on consumer spending behavior."

As for the effects of the now-prevailing tailwind of tax reform, corporate America writ large sported some gaudy all-in numbers for the first round. Earnings-per-share growth across the S&P 500 billowed to 23.1% to start 2018, or by far the highest reading of the mid-to-late cycle results since 2014. S&P Global's quarterly projections for the balance of the year range roughly from 18% to 22%, which compares with forecasts from 10% to 12% before the new tax policy was cemented.

Stronger core earnings are driving down leverage and boosting cash-flow coverage, perhaps extending the horizon for issuers to make tougher balance-sheet decisions. Average leverage across the S&P/LSTA loan-issuer sample was lower year to year and sequentially at 5.1x for the first quarter, which compares with an average of 5.3% over the last three years. On a weighted-average basis, leverage of 5.45% in the first quarter is down roughly half a turn from the trailing average.

Average cash-flow coverage ticked up sequentially to 3.25x, while the weighted-average measure of 3.01% increased from 2.7x in the fourth quarter of 2017 and boosted the metric above the 2.8x average over the last three years.

In the meantime, alarm bells faded for the most exposed credits. The percentage of issuers within the sample with debt leverage of more than 7x tumbled to a multiyear low of 16.6% in the first quarter, down more than 3 percentage points from the fourth quarter of last year and 6 points from the first quarter of 2017. And the proportion of entities with cash flow coverage of less than 1.5x slipped below 20% for the first time for the measurement period, from 22.8% in the fourth quarter of 2017 and 23.2% a year earlier.
