Leveraged loan issuers posted another round of surprisingly robust results for the third quarter, bolstering the cushion for borrowers as the Fed noses the US economy into an uncertain landing in the quarters ahead. Across LCD’s sample of leveraged loan issuers that file their results publicly, average leverage declined in the third quarter from the second quarter, while interest and cash flow coverage ratios tracked higher.
The sample includes 156 issuers within the Morningstar LSTA US Leveraged Loan Index, or 13% of the index.
Gravity-defying results for the sample included year-over-year EBITDA growth of 14%, on revenue growth of 15%. For the earnings metric, it was the sixth double-digit increase in the last seven quarters, while revenue growth has reached double digits in all seven quarters since the start of 2021, according to LCD.
Of course, those operational trends are in sharp contrast to a dismal backdrop for funding, and widespread expectations for rising distress and defaults over the year ahead. But issuers will shoulder into those headwinds on the strength of credit metrics that remain substantially stronger than their pre-pandemic levels.
Take the debt-to-EBITDA leverage ratio. On a straight average basis, leverage declined to 5.02x in the third quarter, from 5.17x in the second quarter, and 5.34x in the first quarter this year. While the latest level is up from the post-pandemic low (it was 4.86x in the third quarter last year), it remained below the 5.35x level in the final quarter of 2019.
On a weighted average basis, leverage of 5.50x in the latest quarter was slightly higher from the second quarter level (5.46x), but it too held well below the level in the fourth quarter of 2019, at 5.91x.
If the back half of 2022 proves to be a liminal period for the earnings cycle, issuers will go out with a bang. Resilient demand trends through most of the third quarter propelled cash flow coverage for the LCD sample to all-time highs, including to 4.50x on a straight average basis (from 3.91x in the second quarter, and a pandemic-era low at 2.74x in the second quarter of 2020), and 4.18x on a weighted average basis (from 3.73x in the second quarter, and a pandemic-era low at 2.51x in the first quarter of 2020).
And while issuers face down substantially higher funding costs going forward, their aggressive refinancing efforts in 2020 and 2021 continue to support other key credit ratios. Interest coverage for LCD’s sample, on a straight average basis, ticked four basis points higher, to 5.98x, which marked a ninth straight sequential increase from the pandemic-era low at 4.14x, in the second quarter of 2020. (Interest coverage on a weighted average basis dipped seven basis points, to 5.49x, but that too held well north of the 3.79x low recorded in the second quarter of 2020.)