Credit markets update: Q3 - 2019

KPMG Corporate Finance LLC's Q3 Credit Markets update

Mike Rudolph

Mike Rudolph

Managing Director, KPMG Corporate Finance LLC

+1 312-665-1442


Why borrowers should consider reassessing their capital structure

Despite default rates remaining at historically low levels, borrowers should consider reviewing their capital structure in light of current market dynamics, including:

  • High distress ratio levels: The percentage of speculative-grade borrowers with outstanding loans bid below 80 cents on the dollar, has reached a three year high of 4.0 percent. This is an increase from 2.8 percent in the previous month. 
  • Increase in covenant lite loans: Loan issuer distress is climbing while defaults remain historically low might seem counter-intuitive. This is a trend that’s continued since the end of the financial crisis in 2007-2008. With the growing rate of covenant-lite loans (80 percent of newly issued leveraged loans), along with other deterioration in credit documentation, borrowers today are better able to avoid technical defaults, even though their financial condition might have worsened. 
  • Influx of single B loans: The loan market is becoming more risky based on loan ratings. The share of outstanding loans rated single B or below increased for the  third consecutive month to 48.4 percent while the share of loans rated CCC+ or below now stands at 7.0 percent, its highest level in two years.
  • Mixed corporate earnings results: Investors are dealing with mixed Q3’19 corporate profit reports that implies a murky outlook on the U.S. economy. Corporate growth is weakening as many companies, particularly multi-nationals, try to manage the effects of trade tensions.
  • Higher leverage: A recent S&P Global Ratings report revealed that debt and earnings rose in tandem between 2011 and 2017, but the trend diverged in the first half of this year, with debt growth surging while earnings growth fell. The ratings agency analyzed the corporate debt, leveraging and earnings trends of over 20,000 mostly medium-sized non-financial companies globally.

As you review your company’s capital structure, consider the following questions:

  • Is your company’s current level of debt and equity aligned with your strategic goals?
  • Would your company benefit from more flexible debt?
  • Is your company in covenant default or are you experiencing tension with your lenders?
  • Do you have the appropriate capital provider relationships to execute your growth plans?

How KPMG’s Capital Advisory team can help in reviewing your capital structure

KPMG’s Capital Advisory team is a leading global financial advisor with real time knowledge of the capital markets by maintaining close relationships with debt, mezzanine and equity capital providers. We advise on a wide range of transactions involving both debt and equity, including raising capital for refinancings, acquisitions, dividend recapitalizations, growth capital and special situations. We can assist by conducting a review of your company’s capital structure and recommending a holistic, customized financial solution.


Source: S&P Global Market Intelligence.

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Credit markets update: Q3 - 2019



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