Citi says falling stocks save companies from heavy debt

The current year’s stock market slump has been muted for blue-chip organizations with huge debt loads, signaling that larger borrowers may be in a better position than the stock market as a whole and the point of view of corporate bonds is less bleak. The 50 organizations with the most bonds outstanding, excluding banks, saw their shares fall less than 1% this year through Friday, according to Citigroup corporate debt strategists led by Daniel Sorid . It depends on top quality borrowers and charges returns based on an organization’s outstanding debt.

The numbers underscore how unevenly distributed stock market declines are. Shares of three of the largest U.S. telecommunications companies, including AT&T, rose in 2022 through Friday, according to Citigroup. These companies are among the largest issuers in the US investment grade corporate bond market, but they are further down the list in terms of US market value.

The S&P 500 index, which weights companies by market value, was down 7.7% through Friday and plunged even further on Monday.

“The weakness in the stock index this year paints, so far, a misleading indicator of risk sentiment for credit investors,” the strategists wrote in a report dated Jan. 23.

Financial results are still relatively strong for high-profile companies, at least for now, Citigroup said. Revenue grew by around 11% in 2021, while debt grew only around 8% over the period, according to the bank’s debt-weighted average of a sample of 24 issuers.

Good results

But there are signs that the results are getting a little worse. Income available to pay debt, known as earnings before interest, taxes, depreciation and amortization, contracted last quarter among the 24 companies.

And U.S. corporate bond investors have grown a little more nervous in 2022. Risk premia for high-quality corporate debt have widened by 0.08 percentage points since the end of last year, to hit 1% on Friday, according to Bloomberg index data.

This may be partly explained by the fact that companies sold so many investment-grade debt securities in 2022: more than $137.3 billion, compared to around $95 billion at this point last year. Important sales

There could be disproportionately high issuance in the coming months as borrowers seek to lock in low borrowing costs before the Federal Reserve begins raising rates, Citigroup strategists wrote. Between 2010 and 2021, gross issuance through Jan. 21 was about 7.8% of the year’s supply on average, the strategists wrote. In 2017 and 2018, years when the Fed was up, the first few weeks of the year were closer to around 9% of total annual issuance. The central bank could start tightening the money supply as early as March.

Investors looking to play against the grain should consider buying bonds from U.S. banks, which have lagged in recent weeks due to massive issuance, strategists say.

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