Headline results:

• Median values show Q3 sales increased +17.1% YoY, reported EBITDA was up +10.4%, with EBITDA margins down 70 bps. Net leverage was mostly unchanged
• All industries registered YoY sales growth, predictably the fastest was for Energy (+41.9%) and Utilities (+45.0%), and the slowest for Communication Services (+6.5%) and Real Estate (+0.8%). It was a similar pattern for profitability too, and only Real Estate (-3.4%) posted a YoY EBITDA decline
• While Unrated (+25.0%) and Triple CCC (+21.7%) issuers had the highest growth in sales, they also show the greatest variance in EBITDA, +26.1% and -2.2% respectively

Of course, headline figures only tell so much – our reporting and analyst teams are on hand to add colour to the data and collect comment across the market. We include a number of links to some of the credits we’ve covered in the report below.

The Big Picture

Higher price levels can be seen in notable top-line growth, with a 0-10% rise versus Q3 2021 most common. This, in addition to higher demand and a favourable 2021 comparison led median sales to increase +17.1% YoY.

Similarly, median reported EBITDA was up +10.4%, suggesting that (broadly) margins have held up quite well. A margin drop of 0-5% points was most common, with a median -70 bps fall YoY.

And finally, company-reported net leverage held steady, trimming just -0.02x over the quarter for a median of 3.5x across our sample (mean average 4.3x). Note this excludes 19 issuers with non-meaningful leverage, mostly due to net cash positions.

Industry

It’s been quite a quarter for Energy firms. Except for KCA Deutag (exiting of Russian business) and Nostrum Oil & Gas (our Restructuring QuickTake), all saw revenue growth year-on-year.

With production bolstered by the acquisitions of Summit and Siccar Point at end-Q2, North sea O&G producer Ithaca Energy made use of strong commodity prices (Q3 realised oil price of $97/bbl, and realised gas price of 270p/therm), to post EBITDA(X) of $531m, up +141.4%.

High power prices have also rolled through Utilities. Fitch Ratings highlight the additional benefit for those generating clean energy, versus thermal generators, where increased input costs have hampered profitability. Renewable energy firms European Energy and PNE top the list of our sample for YoY increases in EBITDA.

Vertically integrated Utilities have the mixed blessing of increased profits from generation likely offset by higher costs in their energy supply arms. Energia group for example, saw EBITDA rise (+93.5% YoY) due to higher contributions from the group’s two CCGT plants, and in particular from renewable PPAs, driven by higher energy prices and windier conditions. This was partly offset by the resulting lower electricity and gas margins in its customer and business facing brands Energia (RoI) and Power NI (NI) – further complicated by industry-wide revenue caps and windfall taxes.

Higher input costs were also a key feature in the paper markets. In response, groups like Lecta have issued a string of price increases, and while tissue products manufacturer Wepa posted a +25.6% EBITDA gain YoY, sequentially profits dropped against Q2 due to cost pressures and volume effects from a cyber attack. Q4 is expected to be much better as the contract lag on its price increases rolls off, although liquidity remains a concern. Italian paper and packaging company Pro-Gest also had a weaker third quarter. Well flagged by management, and after a bumper H1, EBITDA and its margin halved YoY to €11m (6.3%).

Turning to Consumer Discretionary, a number of Apparel / Retail names were troubled by low single digit sales declines, and marked losses in EBITDA. Hit by a quick one-two, HSE24, the German TV- and E-commerce business over-ordered stock prior to the Ukraine-Russia war, just before the consumer climate sharply deteriorated. Now searching for liquidity, flash sales and free delivery were orders of the day. This saw EBITDA and its margin more than halve when compared to the prior year. 9fin’s Nathan Mitchell provides more colour

Elsewhere, we’ve covered another poor quarter for beauty product retailer Oriflame, whose board still plans to go ahead with a €30.5m dividend despite EBITDA dropping -48.9% YoY (the second largest fall across our sample). And as we reported for the hygienic products manufacturer Ontex, EBITDA improved +28% QoQ in core markets, but was down -41% YoY. Sequentially, Q3 earnings have seen better cost absorption, and while leverage jumped 0.9x on working capital pressure, guidance suggests it’s likely to drop below 6.5x by Q4-end.

Much of this underperformance was already reflected in instrument pricing, but there may be some opportunities out there for those unfairly punished names. Credits like Maxeda (Q3 EBITDA -19.2% YoY) were hit hard early in the year as the DIY “home improvement boom” eased off and large blocks of its 2026 SSNs were offered in secondary. But, with okay-ish Q3 results (EBITDA is still above 2019 levels), the SSNs are up ~7 pts over the last month.

Industry–Sector

Rating

Since we’ve used the latest CFR to group these companies, it’s probably not a surprise to see Triple CCC credits as the only group to experience a YoY fall in EBITDA, despite good sales growth.

At the lowest end of the credit spectrum, several of these names are well represented on 9fin’s restructuring watchlist. The distressed team have been busy updating developments in troubled Industries like Real Estate (Adler Group and others), and single-name situations like Frigoglass (YoY sales +38.5%, EBITDA -45.0%).

Other family favourites, like chicken producer Boparan (Caa1/B-), have less immediate debt maturities. Stabilisation in poultry segments mostly outweighed challenges in Meals & Bakery, so it was “as expected; no new nuggets” reported Denitsa Stoyanova.

Elsewhere names like Hurtigruten made progress returning to pre-crisis top-line figures. The Norwegian cruise liner posted sales up +217.0% to €195.3m for Q3, but EBITDA margins are still just 18%, well shy of the 37% recorded in Q3 2019. Our coverage here.

It was a similar theme for Unrated names like Finnair. Sales jumped +260.7% YoY as pent-up demand was realised, and while few travel restrictions and constrained capacity offered healthier yields and improved passenger revenue, EBITDA levels are still around 60% of Q3 2019. Some strong performance can also be attributed to the buoyant Energy Industry, with other unrated names including DOF ASA (+24.3%), Fugro (+43.8%), Aker Solutions (+63.2%), Prosafe (+93.6%) and Hellenic Petroleum (+303.2%).

What’s next?

Looking ahead, 9fin’s distressed/restructuring guru Chris Haffenden predicts there’s pain to come:

“While the majority of Q2 and Q3 earnings were better than expected, as companies saw strong growth in their revenues from price hikes, the outlook for the fourth quarter is less rosy. Speaking to 9fin, a number of advisors report a sharp deterioration in recent weeks.

“From company and sponsor side conversations, the situation is very bad, is unprecedented and worsening rapidly,” said the restructuring lawyer. Supply chain issues and input costs are continuing, but with a deterioration on the demand side and rate risk impacts not yet appearing in the numbers. The lawyer said that companies were finally seeing a reduction in orders, especially in manufacturing and consumer businesses. Markets are also underestimating the level of civil disruption and extent of distress at Emerging Markets Sovereign level [as other external factors], they added.”

So, not all good news. We eagerly await to see how much this will be reflected in Q4 22 numbers.