M O R G A N S T A N L E Y R E S E A R C HEuropean Credit Strategy
July 2, 2018
1Q18 Fundamentals – IG Non-Financials
M O R G A N S T A N L E Y R E S E A R C HEuropean Credit Strategy
July 2, 2018
Investment Grade | Pace of Improvement in Leverage Has Slowed
Leverage holding steady… Gross leverage for EU IG corporates stood at 2.5x in 1Q18, essentially unchanged from
the prior quarter, but still 0.3x lower than a year ago. The slowdown in deleveraging is more apparent when taking
cash holdings into account. Net leverage was flat at 1.9x in 1Q18 both on a quarter-on-quarter and a year-on-year
basis. This marks a significant shift from the consistent quarterly improvements seen in the prior eight quarters.
…amid slower earnings momentum and debt reduction: Earnings growth remained healthy for the median
European IG corporate. However, in line with our equity strategists’ forecasts, momentum has slowed this year. The
latest YoY LTM EBITDA reading stood at 5%, down 2pp from the prior quarter. Meanwhile, the total debt stock
continued to decline, albeit at a more moderate rate. We also note that net debt stayed broadly unchanged from a
year ago.
…driven by slowing earnings momentum and less debt
reduction
Stalling improvement in balance sheet leverage…
Source: Bloomberg, company data, Morgan Stanley Research Source: Bloomberg, company data, Morgan Stanley Research
-10%
-5%
0%
5%
10%
15%
20%
25%
Dec-00Jun-03Dec-05Jun-08Dec-10Jun-13Dec-15
YoY LTM EBITDA
YoY Total Debt
1.2x
1.4x
1.6x
1.8x
2.0x
2.2x
2.4x
2.6x
2.8x
3.0x
3.2x
1.2x
1.4x
1.6x
1.8x
2.0x
2.2x
2.4x
2.6x
2.8x
3.0x
3.2x
Dec-00Jun-03Dec-05Jun-08Dec-10Jun-13Dec-15
Gross LeverageNet Leverage
M O R G A N S T A N L E Y R E S E A R C HEuropean Credit Strategy
July 2, 2018
0%
5%
10%
15%
20%
25%
30%
35%
< 1x1x - 2x2x - 3x3x - 4x 4x
Net Leverage Distribution
1Q171Q18
Investment Grade | Fundamental Improvements Concentrated in the Tails
Tails are still improving: The slowing trends at the median level are also reflected in the distribution across
leverage buckets. The corporates with net leverage between 1-4x remained broadly unchanged from a year ago.
Meanwhile, the tails continued to show further improvement, with the least levered cohort (<1x) increasing by 4pp
to 32%, led by the operating arms of auto companies. The right tail of 4x+ leveraged names shrank by 3pp YoY.
Mixed trends within the leverage components: While the median EBITDA growth stood at 5%, only 68% of
issuers in our universe reported an improvement in EBITDA during 1Q18, down from 74% seen a year earlier. At
the same time, 51% of corporates experienced a fall in net debt. The overlap of falling net debt and rising EBITDA
accounted for 33% of our universe, below the 39% seen a year earlier. On the flip side, 14% of corporates saw a
year-on-year deterioration in both metrics, up from 9% in 1Q17.
YoY LTM EBITDA vs. YoY Net Debt Net Leverage Distribution Improved Over the Last Year
Source: Bloomberg, company data, Morgan Stanley Research Note: Figures show percent of corporates; values in brackets show as of 1Q17 Source: Bloomberg, company data, Morgan Stanley Research
YoY LTM
EBITDA growth
YoY Net Debt rise
YoY LTM
EBITDA decline
YoY Net Debt fall
Improving
Fundamentals
Deteriorating
Fundamentals
33% (39%)35% (35%)
14% (9%)18% (17%)。