Australian corporates are well placed to meet their debt obligations, in the face of rising interest rates and a softer economic outlook, according to new research.
BondAdviser reviewed the credit positions of all ASX 200 companies, excluding financials, and found no evidence of over-gearing among Australia’s largest companies.
The investment researcher said: “Following the RBA’s unexpectedly hawkish 50 basis point hike on June 7, the ability for companies to meet debt coupon and principal demands has arguably decreased. Corporates are exposed to gapping yields and a higher cost of debt as benchmark yields rise.”
Credit spreads of AUD-denominated corporate bonds have widened over the three months to the end of May. Spreads on BBB-rated bonds widened by 30 bps over the three months, A-rated bonds by 29 bps and AA-rated bonds by 40 bps.
BondAdviser found that in the case of companies that have been in the ASX 200 for 10 years or more, the ratio of net debt to EBITDA was an average of 1.8 times in the first half of 2021/22. The ratio is up from its level in 2020/21 but in line with the long-term average.
For the other companies in the ASX 200, the current net debt to EBITDA ratio is a little over one time, compared with the long-term average of 0.8 times.
“Although there has been an uptick from the more conservative levels in 2021, market-wide net debt is not at concerningly high levels relative to EBITDA,” BondAdviser said.
Looking at equity to total assets, BondAdviser said there would be little cause for concern if business conditions deteriorate.
“The equity buffer in the system is substantial and is not dissimilar to levels that have previously allowed for successful navigation of distressed operating environments.”
And looking at cash balances, the pre-COVID average for cash as a proportion of assets among companies in the ASX 200 for 10 years or more was 6.4 per cent over the long term. Harvesting cash became a priority during COVID and the average over the past two years has been 8.6 per cent.
For the other companies in the ASX, cash-to-assets rose from 9.8 per cent to 12.3 per cent over the same period.
BondAdviser estimated there are 18 companies in the ASX 200 that would fail to meet their short-term debt repayments with rolling EBITDA from 2020/21 and the first half of 2021/22. This number would increase to 29 in a recession of COVID intensity.
These companies would have to turn to cash balances to meet short-term debt maturities. BondAdviser estimates that 15 companies would be unable to use cash balances and would have to refinance.