In the “it all ends happily ever after” view of capital markets, companies have spent a couple of productive years lowering debt levels and restructuring, and are now ready to grow, issue and acquire. Hence there is lots of work for everybody and mega bonuses are back.
Nice scenario but one that is not completely true if you believe Barclays Capital’s research team, who, being detached eggheads, think they will stay in a job whether the European corporate bond market’s golden 2003 continues into 2004 or not.
And they are quite definitive that it will not. They say that while the global economy is powering ahead (US growth they estimate at 4.8%, European growth at 2%), swap spreads are set to widen and credit fundamentals remain poor.
There is also the little known fact that for all the huffing and puffing, corporates have hardly deleveraged at all. It only needs a negative event or two and this fact could be harshly exposed.
“There has been a lot of talk of deleveraging which is great for the corporate bond market. It would be even better if it was really happening,” says Gary Jenkins, global head of credit research. Barclays’ figures show that in 2001, 2002 and 2003 net debt/EBITDA stayed more or less constant at around 2.1 times. It remains stubbornly high compared with the 1.5 to 1.95 times that existed in 2000.
What has happened is that corporates have termed out debt to avoid the problem of short-term refinancing rather than reducing the stock. Mr Jenkins describes this as “corporate bond investors lending money to term out debt to make the market better for corporate bond investors”.
Reducing debt is a tough one for CEOs. Rights issues are usually greeted with derision, often cost CEOs their jobs and put their options deep below the waves. Selling assets does not help if cash ratios get worse.
The only hope is for companies to grow their way out of the problem. If the economic recovery continues, fine. But any sign of stalling – or mishandling of inevitable interest rate rises by the Federal Reserve – and happy endings are off the script.
