Corporate Leverage: Trouble Ahead?

Data Explorers yesterday published a study which shows that short sellers are increasingly focusing on companies with high net debt to equity ratios. Widening spreads between 3 month Libor and 3 month US swap rates could indicate that banks are becoming more reluctant to lend to the corporate market as inflation expectations begin to rise. This would have a negative impact on companies’ ability to refinance or raise new debt in the market. Companies of note in the report include: Yell (YELL), Debenhams, Grupo Ferrovial (GRFRF.PK), Sacyr Vallehermoso, Caterpillar (CAT) and AutoZone (AZO).

We have combined Factset’s screening tools with our proprietary indicators to highlight the top ten companies in the US, Europe ex UK, Japan and the UK which have a high net debt to equity position combined with high and rising short interest.

Please click on the link below to download the full article.

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Balance Sheet Strength V02.pdf	137.63 KB

Comments

[whidbey:]

Very interesting. Thank you, this matrix is likely very timely.

Jun 19 02:55 PM

[tailspin:]

AZO amazes me all the time. With a share price of around $155 and a ratio FCF/Share of about 1/16 the stock seems to be not quite cheap.

After the Aug 08 10-Q statement I noticed, that if the Goodwill is being removed from the balance sheet AZO would own NOTHING.

Now with the latest May 09 10-Q you dont even have to remove the Godwill anymore. The equity is already < 0.

Q: Who in the world buys that crap?

A: AZO themselves, they spend all their cashflow plus some to buy back shares at record prices.

When has that strategy ever paid off?

Jun 19 05:26 PM

[Walter Kurtz:]

Leveraged firms will be issuing HY debt at record pace to try to refinance the wall of maturing debt. They are desperately hoping the the HY mutual funds inflows will stay strong, generating demand for new paper. Some will not be able to roll debt. If the US economy does not improve or has another leg down before 2011 -2012, we will see numerous defaults.

www.SoberLook.com

Jun 19 05:37 PM

[user396040:]

I believe that in leveraged corporations the best current play is in the debt, not the equity. Spreads and yields are high enough on junk bonds to continue to be attractive, you get paid hansomely while you wait, and even in a bankruptcy you get some compensation.

Jun 19 05:46 PM