Tracking SP500 Net Debt:EBITDA

[bci23]

Does anyone know a good resource to track Net Debt:EBITDA over time for the SP500? Some googling gives me charts over time but they are always old (2016, 2017) and don't provide anyway to continue monitoring up to today. Anyone have a good source they like for this stuff?

 

https://www.zerohedge.com/news/2016-08-04/debt-ebitda-ratios-are-now-highest-history

 

https://www.topdowncharts.com/single-post/2018/03/18/Weekly-SP500-ChartStorm---18-Mar-2018

[chesko182]

What are you trying to get at here?

 

I ask because I used to work in Fixed Income research and this is not something we would look at. There's all sorts of distortions when looking at the S&P, need to take out financials, and then comes the question of whether you're doing it market-cap weighted in which case it would be very low because a lot of the tech co's have negative net debt to ebitda and huge weights so that would skew the whole.

 

Overall I can say that the S&P is a pretty good Investment grade proxy, which as a whole has seen increasing leverage post crisis, in part due to lower rates.

 

The way we would break it down would be by tracking it by credit rating, IG vs. HY overtime, and focus on BBBs which have become a huge part of the IG market and a risk in a downturn because many of them could be downgraded to HY and that migration could have some technical implications in the market (forced selling from insurance companies/pensions/MF etc). And the way you weight it would be by notional outstanding, so bigger issues get more representation (not by market cap which only looks at the equity)

 

Unfortunately I lost access to this data but if you have any specific questions happy to take a stab at them.

[Cigarbutt]

This is potentially relevant but there are multiple variables and aggregate results may need to be decomposed for application versus a specific sector or specific entity. Also, comparing different sources can be a challenge since different definitions may be used for the critical variables.

 

You may find the following interesting (especially the "Debt to EBITDA is Retreating From Post-crisis Highs" graph).

https://libertystreeteconomics.newyorkfed.org/2019/05/is-there-too-much-business-debt.html

Interestingly, note that the graph uses debt and not net debt. The recent "improvement", in fact, has not materialized at the net debt level because the lowering of the ratio can be explained by the massive cash repatriation that us firms completed after the last tax reform with funds mostly going to share buybacks and some net debt reduction but the aggregate cash balance has come down a lot and the net debt ratio has not improved.

 

Another factor that is tainting results in the aggregate is the very unusual manifestation, historically speaking, of concentration of cash in the hands of a few. These days, 5 companies hold about a third of the aggregate cash, the top 1% hold more than 50% of and 45% of the cash pile is held by the tech industry. If you look at specific industries, the leverage picture has become somewhat unusual. This creates also a relative game where a player like CVS (pharmacy), despite carrying a high debt load, looks like Fort Knox when compared to one of its competitors, Rite-Aid.

 

Recently, I looked at RH, a luxury furniture retailer. Below are relevant (significance of the relationship between the numerator and denominator) numbers of the analysis:

 

                                        2010        2011        2012        2013        2014        2015        2016        2017        2018        2019

net debt/"adj." EBITDA        2.8          2.5          1.5          0.8          0.5          0.8          0.8          2.7          3.4          2.4

 

The conclusion that I came away with is that it does not matter that much if leverage increases, as long as the cash flow follows but the company bet that it can capture the excess cash in the top 5% of customers and may have overlooked that debt is stickier on the way down.

 

Because of the cash concentration at the top, an interesting area to look at is the larger pool (larger than the S&P 500). The best way to share an interesting graph coming from La Société Générale is the following link (page 3 of the document showing Russell 2000 {the initial reference mentions R2000 not R200) net debt to EBITDA):

https://fpa.com/docs/default-source/funds/fpa-capital-fund/literature/quarterly-commentaries/fpa-capital-fund-commentary-2019-06_final.pdf?sfvrsn=4

In some sectors and for certain specific entities, we are living in interesting times.