Here at FT Alphaville we are often accused of only publicising the bad news. Well, here’s something more uplifting.
That’s a graph from Dresdner of US corporates’ net debt growth for the past 30 years.
The Fed’s flow of funds data released yesterday showed another deceleration in the debt growth rate for the third-quarter. It’s now down to 3.7 per cent, off from 5.6 per cent in the previous quarter and its record levels in 2007. Incidentally, corporates aren’t the only ones deleveraging — US households are starting to pay down debt for the first time in over 50 years, though much of the media chose to lead on the record decline in households’ net worth yesterday.
Back to corporates, and Dresdner has this to say:
The news from the Fed’s flow of funds data is encouraging, because getting leverage under control is a prerequisite for a sustained improvement of credit spreads. The financing gap (the need for external funds) also declined, and this makes corporates gradually less vulnerable to the credit crunch.
But oops, there’s a downside:
Q3:08 may have been a benign quarter – we think Q4:08 may well bring us to peak leverage levels again. Net debt growth was low in Q3:08, partly because bank lending was limited, and also because bond markets were largely closed for much of the quarter. The latter element has now changed, and net debt growth may well accelerate again in Q4:08. Also, Ebitda numbers surprisingly show a return to positive in Q3:08…
We also worry about declining cash balances, which will likely force corporates to be very careful as to how they use that cash, with probably negative implications for investment spending, and slow dividend growth. In sum, we think that it is too early to look for a sustained improvement of spreads, because leverage is unlikely to be already under control. The funding gap is likely to increase again, which means that borrowing, and bond issuance, should continue to be high for the next 6-9 months
If, however, we do start to see a significant deleveraging we’d also expect to see a decline in volatility. Viz:
Flow of funds accounts of the United States – Federal Reserve