The riskiest part of the corporate debt market is inching toward a historic danger signal
The multiple of leveraged buyout (LBO) debt to earnings has hit 5.8, the highest it has been since the financial crash, according to LCD/S&P.
A debt level of six times earnings has historically been regarded as high-risk territory.
“Covenant-lite” leveraged loans remain at an elevated level, too.
But private equity appears to be putting more of its own cash at stake in LBO deals, and the extreme end of the market has moderated. People are tapping the brakes, in other words.
The Trump administration is taking a relaxed approach to the whole thing.
A key indicator of danger at the risky end of the corporate credit market is creeping toward a hurdle that the US government used to regard as too high, according to data from the Leveraged Commentary & Data unit of S&P Global Market Intelligence.
Last year, the multiple of leveraged buyout (LBO) debt to earnings hit 5.8, the highest it has ever been since the financial crash, according to LCD/S&P, a research organisation which monitors the corporate debt market.
A debt level of six times earnings has historically been regarded as heading into high-risk territory. Above that, US government regulators start to ask whether companies are taking on more debt than they can possibly pay back.
The multiple is a comparison of debt incurred in a leveraged buyout of a company compared to its earnings before interest, taxes, depreciation and amortization (EBITDA). In 2014, in a speech to bankers about whether he wanted to see corporate loans go over six-times earnings, Federal Reserve official Todd Vermilyea said, “No, no, no, no, no.”
In theory, the fear is that investors might stop believing that companies with this type of high-multiple debt are capable of paying it back. If that happened, the supply of cash to fund those debts would dry up, and the companies …read more
Source:: Business Insider