Credit metrics of speculative grade issuers have
stabilized and show signs of plateauing, according to Fitch Ratings' in its
latest installment of the 'Leveraged Finance Stats Quarterly - Fourth Quarter
2012.' Fitch does not view the incremental leverage experience in the fourth
quarter and expected in the first quarter to be either outside of expected
rating levels or indicative of a deteriorating credit environment.
Aggregate debt levels in the portfolio have moderately risen, (by over $31
billion) representing a 5% year-over-year increase. However minor EBITDA margin
expansion has allowed for solid absolute EBITDA levels, offsetting higher debt
levels. This has resulted in leverage in the portfolio to modestly increase to
4.4 times (x) for 2012 relative to 4.3x for 2011.
Fitch observed a growing divergence between 'BB' and 'B' credit profiles. 'BB'
rated issuers leverage increases have been more modest than 'B' rated issuers as
year-over-year leverage increased to 3.2x from 3.0x compared to 5.2x from 4.8x,
respectively. However leverage for both rating levels remain below peaks
experienced through the credit crisis and remain within expected rating levels.
Issuers have continued to demonstrate conservative uses of proceeds and credit
discipline in the market has been sound. Stronger balance sheets and ease of
access to debt markets has provided issuers comfort with current debt levels. In
2012 credit profiles for both 'BB' and 'B' rated issuers experienced a
strengthening of liquidity positions, extended maturity profiles, and lower
interest costs.
Overall liquidity positions remain strong as issuers have maintained a sound
liquidity. On average, 'BB' rated issuers have approximately 81% available on
their revolving credit facilities versus 72% for 'B' rated issuers.
Free cash flow (FCF) in the fourth quarter was pressured from an increase in
dividends related to tax policy uncertainties. This ultimately resulted in 2012
FCF in the portfolio declining almost $13 billion to $6 billion for 2012. Total
dividends in 2012 totaled $16 billion, and combined with share repurchases
almost $22 billion was returned to shareholders in 2012.
The first quarter repricing wave experienced in the leveraged loan space further
allowed issuers to reprice their capital structures at more attractive rates.
Interest cost savings are just starting to take effect in current coverage
metrics. Improvements should begin to be fully realized in 2013, as interest
coverage has remained relatively flat through 2012 for both 'BB' and 'B' rated
issuers at 5.0x and 2.8x, respectively.
Enhancements to credit profiles in 2013 could be limited as a challenging
top-line growth environment persists and capacity for further cost cutting
remains difficult. Further improvements in interest coverage are however
expected as discussed earlier. Stable credit profiles for most high-yield
issuers should allow a buffer to withstand a prolonged period of weak economic
growth or a macroeconomic shock
Additional information is available at www.fitchratings.com.
Source: Fitch Ratings
