Struggling US companies are deliberately exaggerating how much money they expect to make – and that could lead to an economic crash


George Glover
Mon, February 20, 2023 

Most speculative-grade bond issuers exaggerate their earnings outlook, according to new analysis by S&P Global.Johannes Eisele/AFP via Getty Images

As many as 97% of companies that issue poorly-rated bonds fell short of earnings forecasts made in 2019, according to S&P Global.

They've likely been deliberately exaggerating a key metric known as Ebitda.

The juiced-up earnings increase the risk that the companies will fail to repay their debt.

Most low-rated bond issuers are probably exaggerating their earnings outlook, according to a new study – raising the risk of widespread defaults or even a "black swan"-type event.

S&P Global analyzed every speculative-grade company that announced an acquisition in 2019 and found that all but 3% of them had failed to hit their target for a key earnings metric known as Ebitda the following year.

Ebitda, which stands for earnings before interest, taxes, depreciation, and amortization, is used by many companies as a measure of their core profitability – but S&P Global said its latest findings show that the metric is often abused by smaller companies.

"Most U.S. speculative-grade corporate issuers cannot come close to achieving the earnings, debt, and leverage projections presented in their marketing materials at deal inception," a team of credit analysts led by Olen Honeyman said.

"Our study is a reminder that, in general, Ebitda adjustments do not provide an accurate picture of future earnings," they added.

Speculative-grade companies are designated by ratings agencies like S&P Global, Moody's Analytics or Fitch Ratings as the bond issuers that are least likely to be able to repay their debt.

As many as 93% of speculative-grade issuers that announced deals in 2017 and 96% that announced deals in 2018 also failed to meet their Ebitda targets a year later, according to Honeyman's team.

Companies that aren't profitable can't repay bondholders – so S&P Global's findings highlight the elevated risk of a potential fixed-income market disruptions.

"Companies consistently overestimate debt repayment," the agency said.

"Together, these effects meaningfully underestimate actual future leverage and credit risk," the strategists added. "They also contribute to incremental event risk."

S&P Global isn't the first organization to be skeptical about Ebitda.

The Securities and Exchange Commission requires listed companies to show how they worked out an overall Ebitda figure and forbids them from reporting the metric on a per-share basis.

Sixth Street Partners co-founder Alan Waxman also warned in 2019 that so-called "fake Ebitda" would likely worsen the next economic crash.