A Few Industries Are Behind Rising Corporate Leverage

Investor concern over corporate leverage isn’t limited to triple-B-rated companies. Since the financial crisis, there has been a significant increase in debt and an uptick in leverage.

In the U.S., corporate borrowing has soared above $6 trillion to a new high. At the end of 2018, nonfinancial public companies had net debt equivalent to 1.7 times a measure of earnings, according to an analysis by The Wall Street Journal. That compares with 1.2 in 2010.

In the U.S., corporate borrowing has soared above $6 trillion to a new high.


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But investors and analysts are watching this data more with concern than alarm. While the debt numbers are large, the rise in leverage, comparing debt levels with income, has been moderate and underscores the accompanying gain in corporate earnings power as the economy improves.

The U.S. economy remains largely sound despite this month’s market unrest, and low interest rates since the financial crisis have given companies and individuals an opportunity to carry debt at a lower cost, potentially affording some more leeway should economic conditions tighten significantly.

“We’ve had 10 years of pretty low rates, so naturally we’ll see companies issue debt to fund mergers, acquisitions and repurchases,” said Jeff Khasin, a fixed-income credit strategist at CreditSights. “Naturally, leverage goes up when debt is cheap. We’d like to see the numbers come down, but we’re more concerned” about some individual companies.

To illustrate where corporate leverage is increasing, the Journal analyzed the reports of more than 9,000 public companies filed annually with the Securities and Exchange Commission. For 2009 through 2018, the ratio of net debt, or debt minus cash, was analyzed relative to earnings before interest, taxes, depreciation and amortization by industry.

Companies that provide professional, scientific and technical services posted the largest jump, with leverage rising to 1.5 from 0.02 in 2009. The manufacturing industry rose to 1.16 from 0.56, while agriculture, fishing, forestry and hunting companies cut their ratio to just under 0.15 from almost 0.79 in 2009.

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