Global Credit Research - 27 Mar 2015
Toronto, March 27, 2015 -- US
investment-grade non-financial corporate credit quality will
deteriorate this year as companies continue to limit capital
investment while taking on higher leverage and using cash to
reward shareholders. Companies are increasing cash dividends,
leaving less free cash flow to repay debt today than before
the recession, according to a new report from Moody's
Investors Service.
In "Macroeconomics and
Corporate Policies Eroding Credit Quality in 2015" Moody's
notes that even as corporate credit quality deteriorates and
returns decline, debt investors continue to invest, creating
demand pull and inadvertently rewarding companies that
allocate EBITDA in ways that weaken their credit quality.
"Prolonged low interest rates
have made dividends more important to investors, leaving
companies increasingly fixated on dividend growth," says
Moody's Senior Vice President, Bill Wolfe. "But this weakens
their credit quality, especially as leverage is rising."
Leverage is increasing while
the proportion of EBITDA used to cover interest expenses has
remained steady, suggesting that companies are managing to an
interest coverage metric rather than leverage and principal to
be repaid.
Investors and companies are
taking their cues from elevated macroeconomic uncertainty,
slow and uneven global economic growth and expansionary money
policies, including low interest rates and quantitative
easing.
"Low interest rates, ample
systemic liquidity and bonus depreciation measures mean
companies have more cash, but this has been diverted to
benefit shareholders instead of investment," Wolfe says.
"Expansionary monetary policies have stimulated credit supply
and demand, but capital spending and business investment have
not recovered to pre-recession levels, which may portend low
future growth."
While the objective of buying
back shares is similar to that of paying dividends, Moody's
found that share buyback activity relates to company-specific
attributes and is not affected by expansionary monetary
policies. "Only about 40% of the companies we looked at
routinely buy back shares, and these companies have a common
set of attributes," says Wolfe.
Moody's research subscribers
can access this report at
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1003249
.
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This publication does not
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referenced in this publication, please see the ratings tab on
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credit rating action information and rating history.
Bill Wolfe
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
Tom Marshella
MD-US and Amer Corporate Fin
Corporate Finance Group
JOURNALISTS: 212-553-0376
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