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By Ronald Fink
The
creditworthiness of U.S. corporations is on the mend, thanks to a
bottoming out of profit margins and lower leverage, new research shows.
As a result, the rate of corporate defaults should slow in coming
months, at least in the U.S.
According
to the report published Friday by research firm CreditSights, the
downturn in profit margins for non-investment grade U.S. corporate
issuers that began more than two years ago has leveled out at around
7.5 percent. Margins have fallen sharply from well over 9 percent in
early 2007.
Meanwhile,
CreditSights found that the leverage of issuers of high-yield debt has
fallen to roughly 70 percent of capital from almost 100 percent at the
beginning of this year, based on asset market values.
Of
course, that was driven in part by the sharp rally in equity prices
during the second quarter, which reduced debt in proportion to equity,
rather than by debt repayment exclusively. As a consequence, the
improvement in balance sheet strength could rapidly reverse if the
economic recovery fails to live up to expectations and equity prices
fall again.CreditSights also noted that the volatility of asset values
remains high.
What's more, as CFOZone reported
today, the credit-quality of syndicate loans have plummeted since last
year. Indeed, $53 billion in shared loan facilities are now seen as
uncollectable – a 300 percent increase from last year.
Even so, analyst Kai Gilkes wrote that "the worst is probably over"
for U.S. corporate defaults. Since the downturn began in September
2008, the percentage of U.S. high-yield issuers defaulting on their
debt has climbed from the low single digits to more than 10 percent,
with companies in the automotive, media and cable industries accounting
for roughly two-thirds of those defaults.
Despite
the improvement, Gilkes noted that the rate of corporate defaults is
likely to remain higher than it was prior to the downturn because the
economic recovery is likely to be weak. Meanwhile, defaults in Europe
may continue to climb, since economies there have been slower to
recover from recession.
Also,
more European companies have been financed with bank loans rather than
bonds. That makes it more difficult for those companies to refinance
when they get in trouble.
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