Fitch: Speculative Credit Quality Remains Strong; Future Enhancements Could be Limited

CHICAGO--()--As detailed by Fitch Ratings' in its latest installment of the 'Leveraged Finance Stats Quarterly - Third Quarter 2012', credit quality for U.S. speculative grade debt remains strong as in Fitch's last review ended Sept. 30, 2012. Favorable capital market conditions for the majority of 2012, have allowed issuers to reduce interest costs, improve maturity profiles, and bolster liquidity positions. However, future credit improvements remain challenging for many issuers in 2013.

Aggregate debt levels in the portfolio have moderately increased by 4% year-over-year (by over $20 billion), as issuers have been more opportunistic and aggressive in financing. Minor EBITDA margin expansion has allowed for solid absolute EBITDA levels, offsetting higher debt levels. This has resulted in leverage for both 'BB' and 'B' rated issuers remaining relatively flat year-over-year at 3.3x and 5.0x, respectively.

Stronger balance sheets and ease of access to debt markets has provided issuers comfort with current debt levels. Further deleveraging for most issuers could be limited.

Debt capital markets remain at attractive rates for most speculative grades borrowers. This has allowed issuers to refinance and re-price their capital structures at more favorable rates. However, interest cost savings from lower rates in 2012 has yet to take effect in current coverage metrics. As interest coverage has remained relatively flat through 2012 for both 'BB' and 'B' rated issuers at 4.9x and 2.8x, respectively. Improvements should begin to be fully realized in 2013.

Overall liquidity positions remain strong as memories of a credit crunch have left issuers with a strong focus on maintaining ample liquidity. On average, 'BB' rated issuers have approximately 84% available on their revolving credit facilities versus 71% for 'B' rated issuers. LTM free cash flow remains solid year-over-year. However, it declined quarter-over-quarter as many issuers have channeled excess cash to shareholders primarily in the form of dividends.

Aggregate cash balances in the portfolio increased by approximately 5% year-over-year in the third quarter, as some companies have issued debt at attractive rates and have retained the cash on balance sheet to opportunistically bolster cash positions as well as prefund maturities or acquisitions. Both 'BB' and 'B' rated issuers have seen increases, however, 'B' rated issuers, have experienced a larger increase. This reflects 'B' rated issuance outpacing 'BB' issuance in the third quarter as investor demand has moved down the credit scale.

Overall cash balances have normalized since recession lows, as capital spending has and shareholder-friendly initiatives have consumed some excess cash.

Enhancements to credit profiles in 2013 could be limited as a slow growth environment persists and capacity for further cost cutting remains difficult. However, stable credit profiles for most high-yield issuers should allow a buffer to withstand a prolonged period of weak economic growth or a macro economic shock.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research: U.S. Leveraged Finance Stats Quarterly — Third Quarter 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696478

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Contacts

Fitch Ratings
Adam Dolkart, +1-312-368-2095
Associate Director
70 W. Madison Street
Chicago, IL 60602
or
Mike Simonton, CFA, +1-312-368-3138
Head of U.S. Leveraged Finance
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Adam Dolkart, +1-312-368-2095
Associate Director
70 W. Madison Street
Chicago, IL 60602
or
Mike Simonton, CFA, +1-312-368-3138
Head of U.S. Leveraged Finance
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com