We count 77 stocks which are non-investment grades in the AlphaVaue coverage, excluding financials, property companies and holding companies. We seem to agree with the three main rating agencies except for 13 names for which they are more lenient… so far.

The Coronavirus crisis has to be read as a violent brake to activity and thus as a surge to working capital requirements. Banks may be asked to help (provided they are given some protection, as seems to be happening in France and Thailand) but this is unlikely to be enough to avoid stretched balance sheets becoming more extended ones.

For the universe under review, looking backward at their share price performance (following chart) shows that they never were much in love, even in a context of zero rates. The rationale was and is that zero rates are not indicative of any future growth, which would be the only way for FCF to reach levels where debt principal can be paid back.

NIG stocks’ steady descent

That those firms have not been really paying back their debt is made obvious by the following chart of existing debt inventories, net and gross. The point worth mentioning is that this universe’s gross cash position has increased from c.€100bn back in 2010 to c. €150bn now (against a market cap of €500bn to give an order of magnitude). That gross cash position can be construed as an insurance policy about to be tested.

NIG issuers’ net and gross debt relentless progress

The obvious concern is how this universe would react very negatively to a lasting and deep slowdown. For this universe, 2020 sales growth is seen at +0.8% (weighted average), while the 2019 figure was -1.6% and 2018 managed -0.3%. All of a sudden, that +0.8% looks like a tough call. 2020 earnings are being trimmed down fast with a current combined €31bn for that universe coming from €39bn six months ago. So that the assumption may well be that the €12bn expected as 2020 FCF is a rosy view. Not that it would have made much of a dent in the gross debt anyway.

In other words, the odds that these companies will be pushed faster into zombie land have risen, where financing is rolled and interest served, Japanese style.

List of issuers is available on request : research@alphavalue.eu