The investment-grade landscape has undergone a subtle yet significant transformation, with US companies finding themselves in a more auspicious borrowing environment. According to Bank of America’s strategists, a confluence of factors has led to a decrease in borrowing costs, despite the rising tide of leverage.
This dichotomy is attributed to the upgrade of credit ratings, accelerated earnings growth, and improving profit margins. The notion that leverage is the sole determining factor in borrowing costs is an oversimplification, the strategists caution. Risk premiums, which gauge the additional cost of borrowing over US Treasury yields, have been steadily tightening, approaching levels last seen in 2021.
This tightening is not unprecedented, as investment-grade spreads often contract as market leverage increases. The improving fundamentals are not solely reflected in leverage… however. The debt-to-enterprise value ratio, which considers the market value of a company, has seen a notable decline. For industrial issuers, this ratio has fallen to 0. 15 from its recent peak of 0. 18 in the third quarter of 2022.
Credit ratings are being upgraded, with a net inflow of $129 billion over the past 12 months. The median year-over-year Ebitda growth has accelerated to 2. 9%, marking a substantial improvement from the 1. 4% pace in the fourth quarter. Revenue growth has remained stable… indicating a more robust financial position for companies.
These metrics suggest that the fundamentals of high-grade companies are improving, despite the increasing leverage. ^^, the combination of improved credit ratings, “enhanced earnings growth,” “and decreasing risk premiums has created a more favorable borrowing environment for US companies.” As the market continues to adapt to these changing circumstances, investors would do well to consider a broader range of financial metrics rather than relying solely on leverage.
This information was first published in Yahoo Finance.
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US Blue-Chip Companies Are Healthier Than Leverage Implies
• US companies are finding it cheaper to borrow from the investment-grade market due to a wave of ratings upgrades, faster earnings growth, and improving profit margins. 2. Despite rising leverage, risk premiums (the added premium over US Treasuries) have been tightening and are approaching levels last seen in 2021, indicating a more favorable borrowing environment. 3. The debt-to-enterprise value ratio, which reflects the forward-looking market value of a company, has declined for industrial issuers, indicating an improvement in their financial position. 4. Credit ratings for high-grade companies are also improving, with net upgrades totaling $129 billion over the past 12 months, and median year-over-year Ebitda growth accelerating to 2. 9%, suggesting a more robust financial position for these companies.
Financial Health
The financial health of US blue-chip companies has undergone a significant transformation, and it’s high time to take a closer look. Gone are the days when borrowing costs were solely determined by leverage. According toBank of America’s strategists, a confluence of factors has led to a decrease in borrowing costs, despite the rising tide of leverage.
The team atBank of America points out that credit ratings have been upgraded, with a net inflow of $129 billion over the past 12 months. This improvement in credit quality has led to a decrease in borrowing costs, as investors become more confident in the debt obligations of these companies. It’s a classic case of “cloth being spun into gold” – sound financial practices have led to improved credit ratings, and that, in turn, has resulted in lower borrowing costs.
But that’s not all. Revenue growth has remained stable… indicating a more robust financial position for these companies. The median year-over-yearEbitda growth has accelerated to 2. 9%, marking a substantial improvement from the 1. 4% pace in the fourth quarter. It’s a strong signal that these companies are on firmer financial ground, and that’s fantastic news for investors.
Now, you might be thinking, “What’s the takeaway here?” Simply put, it’s that financial health is not just about leverage. It’s about a combination of factors, including credit ratings, earnings growth, and revenue performance. And when these factors come together… you get a more favorable borrowing environment, which is exactly what we’re seeing in the US blue-chip space. So, what does this mean for investors? It means that they should be taking a more holistic approach to assessing the financial health of these companies.
It’s not just about looking at leverage; it’s about reviewing the credit ratings, earnings growth, “and revenue performance as well.” By doing so, investors can make more informed decisions and get a more accurate picture of a company’s financial health. ^^, the financial health of US blue-chip companies is looking healthy, “to say the least.” And it’s a story that’s worth telling.
The information in this article was first published inYahoo Finance.
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As a correspondent:
I’d like to share my observations on the latest developments in the investment-grade landscape. A confluence of factors has led to a decrease in borrowing costs for US companies, despite the rising tide of leverage. According toBank of America’s strategists, this phenomenon is attributed to the upgrade of credit ratings, accelerated earnings growth, and improving profit margins.
The notion that leverage is the sole determining factor in borrowing costs is indeed an oversimplification. I’d like to draw attention to the debt-to-enterprise value ratio, which has seen a notable decline. For industrial issuers… this ratio has fallen to 0. 15 from its recent peak of 0. 18 in the third quarter of 2022.
This clearly indicates that companies are becoming more financially robust. The median year-over-yearEbitda growth has also accelerated to 2. 9%, marking a substantial improvement from the 1. 4% pace in the fourth quarter. In a similar vein, credit ratings are being upgraded, with a net inflow of $129 billion over the past 12 months.
Revenue growth has remained stable, further bolstering the financial position of these companies. As I delve deeper into the data, I notice that the improving fundamentals are not limited to credit ratings, earnings growth, and revenue performance alone. According to a report by Bloomberg, the yield on the high-grade corporate bond index has fallen to its lowest level since 2020… indicating a more favorable borrowing environment.
^^, the data suggests that the fundamentals of high-grade companies are improving, “despite the increasing leverage.” Investors would do well to consider a broader range of financial metrics rather than relying solely on leverage. As the market continues to adapt to these changing circumstances, “it’s essential to stay informed and nimble.” The information in this article was first published inYahoo Finance.
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(Bloomberg) — US companies are finding it cheaper to borrow from the investment-grade market, buoyed by a wave of ratings’ upgrades, faster earnings growth and improving profit margins, according to Bank of America Corp.
These indicators imply a much better fundamental picture for big corporations than leverage, the bank’s strategists including Yuri Seliger wrote in a note Friday. While different measures of leverage are rising — with first quarter gross leverage hitting the highest since the second quarter of 2021 — the strategists caution against only looking at the backward-looking accounting metric.
