Next up
Next up is Calpine Corporation (NYSE:CPN), an independent wholesale power producer that owns natural gas and geothermal power plants throughout the U.S.
| Metric | 2010 | 2011 | 2012 |
|---|---|---|---|
| Financial costs | -$206 | -$415 | -$541 |
| EBITDA | $1,277 | $1,243 | $1,126 |
| Net debt | $8,734 | $7,983 | $8,934 |
| Interest cover | 6.2 | 3.0 | 2.1 |
| Net Debt to EBITDA | 6.8 | 6.4 | 7.9 |
Figures in $US million, except for ratios
Calpine Corporation (NYSE:CPN) has been increasing its borrowing over the past three years but the company has not achieved earnings growth to the same degree. As a utility company, Calpine Corporation (NYSE:CPN) would be expected to have a slightly higher debt ratio and lower interest cover. However, a worrying trend at Calpine Corporation (NYSE:CPN) is the fact that while net debt has only grown 2% during the past three years, financing costs have exploded 162% — indicating a deterioration in the company’s credit rating.
Furthermore, the company’s rising interest costs have pushed down its interest cover, from more than six times during 2010 to twice last year. If this continues, the company will have a problem sustaining its debt.
And finally
Finally, nursing and care home provider Brookdale Senior Living, Inc. (NYSE:BKD). Brookdale Senior Living, Inc. (NYSE:BKD) is not a REIT, therefore the company is not entitled to preferential tax treatment and because of this, earnings are impacted.
| Metric | 2010 | 2011 | 2012 |
|---|---|---|---|
| Financial costs | -$142 | -$138 | -$146 |
| EBITDA | $382 | $401 | $369 |
| Net debt | $2,407 | $2,387 | $2,567 |
| Interest cover | 2.7 | 2.9 | 2.5 |
| Net Debt to EBITDA | 6.3 | 5.9 | 6.9 |
Figures in $US million, except for ratios
Brookdale Senior Living, Inc. (NYSE:BKD) has kept its net debt under control during the last three years and interest costs have remained relatively stagnant. Currently, after a poor 2012, Brookdale Senior Living, Inc. (NYSE:BKD) is only able to cover its interest costs with EBITDA 2.5 times, historically a low level. Indeed, as I have shown below, over the past three years, the company has, on average, been able to cover its interest costs around 2.7 times.
| Metric | Value |
|---|---|
| 3-yr Average Interest Costs | -$142 |
| 3-yr Average EBITDA | $384 |
| 3-yr average Net Debt | $2,454 |
| Interest cover | 2.7 |
| Net Debt to EBITDA | 6.4 |
Figures in $US million, except for ratios
Having said that, after a solid Q1 performance this year, Brookdale Senior Living, Inc. (NYSE:BKD) is in line to produce EBITDA of $432 million for the full year 2013, which should pull the company’s interest cover ratio back up to just under three times at 2.9.
Conclusion
The three companies above all exhibit worrying trends in debt. Personally, as an investor who likes to preserve his capital, I would stay away until the companies, or their management, commits to a debt reduction plan, or business improves to the stage where interest costs are not consuming such a large amount of earnings over a period of several years, not just a one off.
For a successful long-term investment, companies need to display that they are fiscally prudent and can maintain a consistent level of debt and easily cover interest costs; something none of the three companies above can do. Having said that, Brookdale Senior Living, Inc. (NYSE:BKD) does appear to be pulling itself back towards fiscal health, one to watch for now.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of Supervalu. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article These Companies Are Finding It Hard to Handle Debt originally appeared on Fool.com is written by Rupert Hargreaves.
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