Late last year, we highlighted the disappointing trajectory of balance sheet fundamentals during the course of 2019 as well as the increased challenges faced by over-leveraged companies in executing their debt reduction plans. Somewhat surprisingly, however, despite an even more challenging backdrop for credit fundamentals in 1H2020 – with a sudden stop in the economy and record-setting debt issuance – leverage appears to have only modestly deteriorated relative to year-end 2019 (Exhibits 1 and 2). For example, for the median North American IG issuer, net debt to EBITDA increased from 2.5x at YE2019 to 2.8x as of June 30. Similarly, the median North American HY issuer saw its net leverage increase by 0.3x as well (from 3.7x to 4.0x; again, Exhibit 1). The increases based on gross leverage were slightly higher, as shown in Exhibit 2: 0.6x for IG, and 0.7x for HY. In our view, fundamentals have largely been supported by two pillars. The first is expansionary fiscal policy pursued at the height of the crisis (in late March), which supported household consumption and corporate earnings, and helped mitigate the impact of second-round effects. The second driver relates to corporate capital management. Many firms pared back on shareholder returns over the past few months, choosing instead to conserve financial flexibility. And while gross supply has undoubtedly surged, a large portion of this was done to prefund upcoming maturities and repay other borrowings – this partially explains the larger increase in gross leverage metrics, relative to net. For example, while USD IG gross issuance YTD is now over $1.4 trillion, we estimate net organic issuance (gross issuance minus maturities/redemptions) has only increased by roughly $580 billion. Additionally, commercial paper outstanding has fallen by over $100 billion since late last year.

Source: Goldman Sachs