Credit Profiles Stabilizing:
Minor improvements in top-line growth and margin expansion have increased EBITDA levels, decreasing leverage even as debt levels increase. Leverage for the portfolio has declined to 3.8 times (x) in the third quarter from 4.2x in the previous year and from 7.2x two years prior. Issuers rated 'BB' and 'B' have improved leverage and coverage year over year. However, improvements have started to taper, and continued enhancement could become increasingly more difficult as companies will be challenged to maintain top-line growth in a slow growth environment.
Liquidity Remains Strong:
On average, companies have approximately 73% available on their revolving credit facilities and have enough total liquidity to address debt maturities well through 2013. Cash balances have remained strong, as lasting memories of the 2008-2009 closing of the debt capital markets have left issuers with a strong focus on maintaining ample liquidity. Cash balances decreased quarter over quarter as issuers increased shareholder-friendly activity. This activity was predominately in the form of share repurchases, which increased by almost 16% in the third quarter year over year.
Capital Expenditures Normalize:
Capital expenditures have started to normalize from recession lows, with capital expenditures to revenue in the portfolio increasing to 6.9% in the third quarter from 6% in the previous year. Capital expenditures, however, could be scaled back as slow revenue growth and weak demand prospects persist. Depressed multiples could lead to increased acquisitions as issuers are faced with minimal organic growth.
High-Yield Issuers Well Positioned:
Most high-yield issuers are well positioned to withstand a period of temporary market uncertainty. Continued margin improvement, strong liquidity positions, and extended maturity profiles provide a sufficient buffer in an adverse macroeconomic environment. As of the end of November, out of Fitch high-yield rated issuers, 65% have a Stable Outlook, 23% have a Positive Outlook or are on Watch Positive, and 12% have a Negative Outlook or are on Watch Negative.
Fitch's 'Leveraged Finance Stats Quarterly - Third Quarter 2011' includes over 160 charts and details financial trends, strengths and concerns, and summarizes liquidity positions for 200 companies in the report. The report is available on the Fitch web site.