- S&P anticipates increased stress on credit
- Highly leveraged stocks underperformed the market
- Companies with floating rate debt most at risk
- Survey sees balance sheet health as a priority
MILAN, Nov 11 (Reuters) – Stock pickers have a message for corporate finance bosses and it’s getting louder and louder: strengthen your balance sheets before the recession hits.
After more than a decade of ultra-loose monetary policy, financing conditions are tightening, inflation is rising and the global economy looks set to slip into its first recession since 2009.
Highly indebted companies could face problems as their interest payments rise and earnings growth declines, according to fund managers, who are already turning away from indebted companies.
S&P Global believes that global credit conditions are at an inflection point and expects credit stress to intensify in late 2022 or early 2023.
Rating downgrades are expected to accelerate and overall corporate defaults worldwide are expected to double by mid-2023 from current all-time lows, according to S&P. Europe, struggling with an energy crisis and a war on its borders, will be the most affected by the quality of credit.
“There seems to be a change in attitude on the most leveraged stocks,” said Gilles Guibout, head of European equity strategies at AXA Investment Managers in Paris.
“It pushes investors towards companies that will not be affected by the rising cost of debt. And the pressure on the management (of indebted companies) is building up,” he added.
Bank of America’s most recent fund manager survey shows that 60% of investors want executives to use cash flow to improve balance sheets rather than increase investments or dividends, about the same percentage as during the crash of COVID-19 and the global financial crisis.
“The time has come to save something for the rainy days,” said Giuliano Gasparet, head of equities at Generali Insurance Asset Management in Milan. “I would not be surprised if in future surveys this percentage increases further.”
The importance of a strong balance sheet was reflected this month in a series of wild swings in stock prices.
SBB (SBBb.ST), for example, jumped 46% over two days as falling bond yields offered the heavily shorted property company some relief from refinancing. The Swedish company sold a property for 700 million SEK ($64 million) a few days later and on Wednesday launched a tender for bonds for a similar amount.
Real estate (.SX86P) is Europe’s worst performing sector this year with a 40% decline. Investors fear the highly indebted sector will see restructuring and dividend cuts. CFF shares have fallen nearly 75% this year.
It doesn’t stop there. In Europe, Citi sees utilities and industrials in the crosshairs and estimates that rising funding costs could cut net profit for non-financial companies by 2%. He estimates that 15% of the debt of the STOXX 600 (.STOXX) is floating rate, almost double that of the S&P 500 (.SPX).
Companies ranging from IT consultant ATOS (ATOS.PA), food company Delivery Hero (DHER.DE), public utility Enel (ENEI.MI), auto parts maker Faurecia (EPED.PA), pharmaceuticals company Grifols (GRLS.MC), beverages maker Campari (CPRI.MI) and telephone company Telefonica (TEF.MC) have been mentioned by analysts and investors as potentially facing challenges from rising interest costs.
Heavily leveraged stocks have already lagged this year and fund managers worried about credit stress have reduced their exposure. AXA reduced its holdings in a few stocks due to their level of leverage, Guibout said.
Citi’s basket of highly leveraged European stocks is down 33% this year.
Yet some companies may have been over-punished even though their cash flow and debt maturity profile leave them enough leeway to repay what they owe.
One example is AB Inbev (ABI.BR), the world’s largest brewer, which refinanced and made its debt manageable when interest rates were low, said Thomas O’Hara, portfolio manager at Janus Henderson Investors. .
“A number of these big companies have pushed back the maturity profile…There may be opportunities where babies have been thrown out with the bathwater,” he said.
($1 = 10.9369 Swedish kronor)
Reporting by Danilo Masoni; Editing by Susan Fenton
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