Debt, cash flow move in opposite directions for ASX 100 firms

Debt increases and freed up cash-flows are set to be major themes in 2015 and 2016, according to Matt Jamieson, Fitch Ratings' head of Asia-Pacific research.

Jamieson and his fellow analysts identified the "Top 10" Australian debt, cash flow and leverage trends among the 100 largest non-financial corporates listed on the Australian Stock Exchange. Their findings were presented by Jamieson at Fitch's 2015 Annual Credit Insights Conference in Sydney earlier this week.

And, seeing as Fitch covers less than half of the names in this group, the Fitch team relied on Bloomberg estimates for their forecasts.

Using the numbers, Fitch analysts concluded that there were 69 Australian companies in the "credit positive and neutral" zones, where cash flow growth is expected to exceed, or at least equal, growth in debt.

And, out of that list of 100 largest non-financial ASX-listed corporates, the top five companies accounted for 47 per cent of  market capitalisation and 31 per cent of net debt.

This is consistent with one aspect that debt markets know well: the largest companies have the best access to the capital markets in order to issue debt.

Jamieson noted that, in terms of the one to two year outlook, the net debt of the largest companies was set to increase while the median levels were likely to fall. That is,  the leverage of companies ranked number 11 to 100 by market capitalisation is set to fall over the next one to two years.

These patterns do, however, vary slightly according to sectors. The energy sector's net debt levels were driven up by the higher net debt levels of large companies such as Woodside and Origin.

The natural resources sector's higher leverage starts with lower EBITDA generation by companies such as BHP Rio Tinto and Fortescue Metals.

In contrast, falling leverages in the transport sector are led by companies such as Qantas and Virgin Australia.  In the utilities sector, decline in leverage is being led by industry leaders such as AGL and Spark Infrastructure

The top ten lists from Fitch, via Bloomberg, include the top ten "revenue boosters", "debt raisers" and "debt shedders", contrasted with the top ten "cash flow boosters" and "cash flow dippers".

Looking at the issuers with the greatest influence, Woodside is entering a tough period, with a falling oil price coinciding with rising net debt levels, because of the ongoing debt-funded acquisitions the company is engaging in.

In the case of Leighton Holdings, its move into a favourable zone is due more to its sale of assets and subsequent payment down of debt (such as the sale of the John Holland group earlier this year).

"It's also useful to look at the total amount of debt being raised compared with the total amount of debt being shared," Jamieson said.

"There was A$21.4 billion raised by the top ten debt raisers and there was $17.4 billion shed, so on a net basis there was $4 billion in debt raising.

"And looking at the top ten cash flow raisers there was $5.8 billion cash flow raised among that group, although more than offset by the $8.7 billion dip in cash flow among the cash flow shedders, leaving a net deficit of $2.9 billion among the outliers.

"These deficits show that overall, the credit position and the cash positions are deteriorating."