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Is This The Chart That Has High-Yield Investors Running For The Hills?

Tyler Durden's picture




 

We discussed the major rotation, overvaluation, and underperformance of high-yield credit markets recently as relevering stock-buying-back firms find their source of funding starting to dry up. The question is - why now? Perhaps this chart of the wall of maturing corporate debt ($3.9 trillion by 2019 which will need massive liquidity to roll-over and will eat earnings thanks to higher coupons) is what triggered the anxiety as the end of QE and start of rate-hikes looms close...

 

With no QE and a Fed on the verge of raising rates, rolling over $3.9 trillion in corporate debt (at implicitly higher coupons) means trouble for balance sheets and end to easy cheap buyback-funding...

 

Source: @standardpoors

*  *  *

Remember all that bullshit about pristine corporate balance sheets and cash on the sidelines... well as a gentle reminder we only warned that it was a mirage twenty times as firms added debt while they could... instead of cleaning up, they levered up... debt was not delevered, it was rolled and raised...

Mark Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.

The fallacy of cash piles on the balance sheet meaning strong balance sheets...

 
 

US companies are carrying far more net debt than in 2007

 

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.


 

In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

*  *  *

As we noted previously, this is why 'equity' investors should care

The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit -  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

 

Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.

Jeff Gundlach was right.

*  *  *

Of course we have explained this won't end well...

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.

 

Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

* * *

For those who suggest "running for the hills' is a little strong, yes we know a 35bps correction is 'not much' but from a sub-300bps HY spread perspective it is the biggest 3 week swing in 13 months (since the Taper tantrum) and outflows are the biggest in years...

 

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Mon, 07/28/2014 - 19:56 | 5015166 khakuda
khakuda's picture

Remember when Wile E. Coyote would go over the cliff, pause for a second, then go crashing down?

Mon, 07/28/2014 - 19:58 | 5015173 max2205
max2205's picture

Yes, it's called hang time like in the matrix...it can last forever or not

Mon, 07/28/2014 - 20:50 | 5015332 DJ Happy Ending
DJ Happy Ending's picture

The US has become Japan. There will never be a rate hike.

Mon, 07/28/2014 - 21:19 | 5015458 Wait What
Wait What's picture

"There will never be a taper or a rate hike"

fixed it for ya...

Mon, 07/28/2014 - 19:59 | 5015174 Da Yooper
Da Yooper's picture

For those who suggest "running for the hills' is a little strong, yes we know a 35bps correction is 'not much' but from a sub-300bps HY spread perspective it is the biggest 3 week swing in 13 months (since the Taper tantrum) and outflows are the biggest in years...

 

 

 

Dont ya just hate it when that happens

Mon, 07/28/2014 - 20:05 | 5015189 kaiserhoff
kaiserhoff's picture

Nice chart porn, but pocket change compared to what Munies, States, and the Treasury have to come up with on the same time frame.  Most of the Federal debt is T-bills, ie hot money.

Mon, 07/28/2014 - 20:28 | 5015248 knukles
knukles's picture

Higher coupons?  What higher coupons?  Rates have fallen since the mid 70's.
As Desi wouldda said to Luci: "Somebody don' kno wadday be talkin habout."

Mon, 07/28/2014 - 20:55 | 5015342 kaiserhoff
kaiserhoff's picture

They got some 'splainin' to do;)

Mon, 07/28/2014 - 22:41 | 5015851 willwork4food
willwork4food's picture

Boss says they needs to go swimmin' with the fishess,

Tue, 07/29/2014 - 02:26 | 5016526 michaelbrownira
michaelbrownira's picture

I was about to say same. thumb up.

 

Michael Brown

 

Mon, 07/28/2014 - 20:42 | 5015303 order66
order66's picture

Looks like 2015 to 2018 is a good time to be long.

Mon, 07/28/2014 - 20:56 | 5015350 RiderOnTheStorm
RiderOnTheStorm's picture

i am not so sure what everyone is so worried about.  Didn't Nancy Pelosi assure all of us that the best way to continuously stimulate our economy is through the exponential growth of the food stamp program.  Thanks Nancy, so now we can all eat cake.  After all, even considering the worst that could happen, we can always start printing Trillion Dollar bills like Zimbabwe did, and this whole economic thingy could be over in a day.  Corporate balance sheets be damned!!!

Mon, 07/28/2014 - 22:04 | 5015664 q99x2
q99x2's picture

That's like the student loans. Nobody is going to pay that shit back.

Fuck You Yellen echoes to Bernanke.

Tue, 07/29/2014 - 00:05 | 5016197 Youri Carma
Youri Carma's picture

What about the BS of ending QE and raising rates?

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