Debt-ridden firms hit hard

It’s a new era for Europeans who for eight years got accustomed to watching companies with the worst balance sheets do nothing but rally. Now those stocks are getting crushed by rising bond yields, a trend strategists see continuing.

Companies with the highest debt ratios have tanked 5.5% this month, the worst showing against the Stoxx Europe 600 Index since 2008, data compiled by Goldman Sachs Group and Bloomberg show.

“Get used to it”, says Morgan Stanley’s Graham Secker.

“There’s a perception that the change in bond yields is more structural,” said Mr Secker, the London-based head of European equity strategy at Morgan Stanley.

“This reversal will continue, but I would caution that we’ve had a very big unraveling in a very short period,” he said.

The Goldman Sachs index tracks 33 European companies that rank lowest in measures that compare equity with total liabilities and market cap, and have the smallest cushions for interest payments.

Their debt-to-total assets ratio averages 40%, compared with 24% for the Stoxx 600. The US Federal Reserve’s increasingly likely interest-rate hike next month also bodes ill for companies with high leverage.

“All assets that have been favoured by the tightening of interest rates should be less supported,” said Gilles Guibout, head of European equity strategy at AXA Investment Managers in Paris.

His firm manages €679bn.

“It’s been good for the capital-intensive companies because they were able to reduce their cost of debt for many years. This tailwind will fade,” Mr Guibout said.

Monetary stimulus had helped lift highly leveraged stocks on speculation that corporations with greater financial risk would avoid insolvency.

Investors who were squeezed out of bonds yielding next-to-nothing needed an alternative. While the rate on 10-year German government debt is 0.3%, the Goldman Sachs index pays 5%. The Stoxx 600’s dividend yield is 3.7%.

The fixed-income rout that followed Donald Trump’s election spread to defensive equities that mimic the asset class, also hit firms that would be most hurt by an increase in borrowing costs.

Vinci, Europe’s largest construction company, has tumbled 7.4% this month.

The shares touched the highest since 1998 in August. Brewer Anheuser-Busch InBev is down 8.7%, while Italian utility Enel has fallen 7.8%.