Debt-To-EBITDA Ratios Are Now The Highest In History

Tyler Durden's picture

Remember when nearly a decade ago, just before the last credit bubble burst, investors (at least those who cared about fundamentals) were loading up on risk  - after all "the music was still playing" - but casting fearful glances at the relentless rise in corporate leverage ratios as debt-to-EBITDA was rapidly rising, if not as fast or to levels hit during the dot com bubble, aware that it would all end badly? Well, take one look at the chart below...

But first some commentary from Barclays:

[A] prominent feature of extended bull markets is higher levels of leverage, as measured by the ratio of debt to equity. We found that the debt-to-equity ratio went up during every late-cycle bull market since 1980. Advances in debt and more efficient use of capital structures are obvious ways for companies to offset the economic malaise that sets in toward the end of business cycles and continue to drive stock prices higher. It is when companies stop borrowing because they become more cautious on their capital structures or credit markets tighten that bull markets fail to get extended.


Total debt for non-financial companies in the S&P 500 has increased by more than $1tn since the beginning of 2010. This has fueled the surge in payouts... Companies in the S&P 500 have a cash flow deficit of approximately $150bn per year that must be funded in the investment grade credit market to maintain the current level of share repurchases. While this may be a sustainable amount given the easy conditions and low rates in high grade credit, the days of accelerating growth in borrowings are likely in the past, in our view. This is because some important measures of debt sustainability, such as the ratio of debt-to-EBITDA are already elevated, as shown in Figure 9. The median debt-to-EBITDA ratio of the non-financial companies in the S&P 500 has reached 2.3x, a measure unmatched since 2000, which is the earliest year that we have reliable data.

In other words, the highest in history. Here is Barclays' conclusion:

"Similar to our view on payout ratios limiting dividend growth, we believe debt-to-EBITDA has reached a point where it is becoming a constraint on additional leverage."

While we would be the first to agree, so far companies have proven very resilient to recurring warnings that "peak debt" has arrived, almost exclusively thanks to central banks which continue to force investors to chase what little yield remains, ostensibly in corporate debt - the BOE's launch of corporate debt monetization today being a perfect example this morning - while ignoring all the flashing red signs.

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winflation's picture

Mission accomplished

Cognitive Dissonance's picture

"I have not yet begun to fight." - Auntie Yellen

<"You'll have to pry my cold dead hands off the Ctrl-Prnt keys.">

BorisTheBlade's picture

What if, just as a pure theoretic guess, Aunt Yellen were to raise interest rates significantly? Will the Fed become the biggest owner in the US? That's not capitalistic you say? Indeed it's not, but maybe, just maybe, Soviet-style command and control economy is the end game? Fed seems to have accomplished almost total control over stock market, which moves in unison with its desires.

BuddyEffed's picture
Foursquare Data Shows Trump’s Candidacy Is Hurting His Biz Empire, so does that mean a Trump presidency would hurt America's business empire?



jeff montanye's picture

europe would stop buying apple phones, ford cars and mcdonald's hamburgers because trump was president?

well they gave obama a nobel peace prize based on his really not looking or sounding like george w. bush.  too bad they didn't think about acting like.

so yes.

wonder what would happen if hillary clinton sold something.

besides her soul, that is.

fishpoem's picture

Hilarious! (even though it's like a scene from a Stephen King movie)

BandGap's picture

Just another fancy acronym to ignore.

Football starts in less than a month.

Devils Advocate's picture

But if we can just push interest rates a little lower I a sure we can get that to 3 times!

CPL's picture

They could just go full retard and actually publish a negative interest rate.  That way people could get paid for owing money...oh wait that's already happening.

major major major major's picture

I get calls at work all the time from people offering between $10k and a million $$$ for working capital loans...  I usually ask them to just send me as big of a bag or box of cash as they want and that would be fine... they usually press on so I tell them 100's would be better because then it would not weigh as much and they could save on shipping... they press on... so, I ask if they charge interest on these loans and whether or not I have to pay the loan back.  They seem bewildered at the question but I tell them I don't like paying interest so if they have a negative interest rate loan that would be interesting... or if they just send the biggest box that they can imagine filled with cash (100's preferred) then that would be great... but other than that, not interest-ed

MasterControl's picture

Hmm high during clinton.  Low during Bush.  Skyrocket during Barry.
Yet both parties are the same?

NoDebt's picture

Yeah, but what's debt to Non-GAAP earnings ratio?

See?  You're all calmed down now, aren't you.  Everything is cool.  Go back to sleep.  NoDebt is going to make the bogeyman go away and not come back ever again.

Ban KKiller's picture

Yes, we have "accountants" working on it right now! 

SomethingSomethingDarkSide's picture

Ok thx things were starting to make me anxious for a second there

philipat's picture

Especially because NoDebt to EBITDA, or any other measure, remains ZERO? Good place to be....

Farmer Joe in Brooklyn's picture

Debt is good in hyperinflation...provided the asset it purchased is productive...

philipat's picture

I think you missed the fact that I was responding to an earlier post by "NoDebt". That said, in hyperinflation, any hard physical asset is "productive"? See earlier post, in Venezuela, an ounce of Silver now buys 6 months food. Coming to a "developed" country near you soon...

BorisTheBlade's picture

In hyperinflationary environment no complex industrial process can survive, by the time you finish calculating your costs they went up 100% or more. Kiss goodbye to Boeing, Cat and pretty much any industry. Hyperinflation is very destructive for real economy. Financial sector is screwed as well, since inflation-adjusted interest rate are potentially double-digit negative. Who will prosper? Corporate raiders, currency speculators. Middle class gets wiped out immediately. BTW, real estate in hyperinflationary enviroment deppreciates in real terms.

123dobryden's picture

except there is no food left my friend :)

Reichstag Fire Dept.'s picture

LOL! Thanks, I can ease off my meds.

philipat's picture

Is that a parabola at the top right?

Lady Jessica's picture

I think it's an asymptote

Cognitive Dissonance's picture

Those are not the droids parabolas you're looking for.

Doubleguns's picture

"Similar to our view on payout ratios limiting dividend growth, we believe debt-to-EBITDA has reached a point where it is becoming a constraint on additional leverage.


Nonsense, the man in the moon is pulling it all the way to there.

darkrealm's picture

Company gets loans

Company pays dividends

Company buys stock

The key in the cycle is at what point can the Company no longer borrow?  I guess we will see..

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) darkrealm Aug 4, 2016 10:35 AM

With Central Banks now buying up corporate loans, is the answer: Never?

Cognitive Dissonance's picture

How many times can you divide the remainder in half?

<That is the exponential question.>

I wish I could go back to simpler times when all they were trying to do was count the number of angels that count dance on the head of a pin.

philipat's picture

Or determine the ultimate solution, using Supercomputers (Probably Chinese) to Pi? I understand the computers are still, well, computing? So that would be similar to "how long is a piece of string"?

debtor of last resort's picture

With negative interest rates the pensioner will buy everything the S&P produces in China.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Aug 4, 2016 10:35 AM

When we are already making history, why stop now?

Boston's picture

It's probably nothing

im-a-nut-job's picture

The winky wanky bird is pullin it higher

2ndamendment's picture

This next crash is going to be a spectacular event to behold. 

NoDebt's picture

The next crash will be the widowmaker.  Like Japan had before they fell into their 25 year (and counting) deflationary abyss.  And "policymakers" damned well know it.  Why do you think they're doing everything they can to put that day off as long as possible?


QQQBall's picture

Just lower interest rates. There fixed!

Cognitive Dissonance's picture

But that means eventually you will pay me to take a loan from you.

<I kind of like this flavor of crazy.>

Cryoprase the Troll's picture

My bank phoned me because according to them I had too much cash in my current account.  They wanted me to move it to a deposit account.  Not for my benefit of course.  But to protect themselves if my card got hacked. They pointed out the huge benefits of earning a  pathetic interest rate, at which I laughed.  I then asked them if they'd pay me to go overdrawn to save them money on NIRP assets they owned. Funnily enough they didn't laugh. 

bada boom's picture

This is in anticipation of negative corporate bond yields.

sanjuandon's picture

Can't wait for the BOOM!  then everyone will say that of course this was unsustainable.  Pods.  This happens over and over again.

MrBoompi's picture

These ratios highlight the problem, which is the fact the financial "system" needs to create at least $1 trillion (who knows how big this number is worldwide) of new debt per year or the system will implode.  This is just the logical, mathmatical result of loaning out money created out of thin air at interest.  At some point there just isn't enough money left over to cover the prinicpal+interest payments.  In my opinion QE and other forms of bailouts are the ways the banks mask over this fact.

Spungo's picture

Debt to EBITDA is a completely useless metric. What matters is INTEREST EXPENSE. We'll know shit is bad if interest expense is eating a huge percentage of profits like it was around 1980. That is currently not happening, so there's nothing to worry about. That's not sarcasm. I'm totally serious. My home is 80% debt right now. Do you think I'm worried? My cash flow is doing great. Being at 80% debt doesn't mean I'm in any kind of financial trouble. I would be in a much worse financial position at 50% debt if the debt's interest rate was 10%.

wide angle tree's picture

What happens if you lose your job?

Panafrican Funktron Robot's picture

We have a ways to go before this is fully transmitted through the system.

Lady Jessica's picture

"fully transmitted through the system"

I should remind you this is a sadistic trickle-down economy with a really narrow urethra (hookers and blow can do that to a prostate).

carambar's picture

I wonder if this is Net debt /Ebitda which includes cash or gross debt/Ebitda?  I wouldn't be surprised if it was the latter as analysts tend to look for data that make their point and thus distort the reality.   Zero Hege are a good exemple of this intellectual fallacy to be fair.