‘Unreliable’ Covid Math Is Distorting Reality, Bondholders Warn


Some of the largest fixed income investors in the U.S. are joining a global effort to reject companies’ changes to earnings metrics that account for effects of the pandemic, arguing they’re “unreliable” and “potentially misleading.”

The Credit Roundtable, a bondholder industry group that counts Vanguard Group and Wellington Management among its members, is pushing for regulators and auditors to “carefully scrutinize” the use of Ebitdac -- an adaptation of earnings before interest, tax, depreciation and amortization to include the impact of the coronavirus, according to a letter sent to the U.S. Securities and Exchange Commission Wednesday.

They join their European counterparts and major credit raters like Moody’s Investors Service in rejecting the use of the practice, which “distorts” and “misrepresents” earnings, said David Knutson, the Credit Roundtable’s vice chair.

“We are concerned that recent examples of highly subjective reporting that attempts to show normalized results during economically volatile times will result in an unreliable basis for investment,” according to the letter, which was also sent to the Fixed Income, Currencies and Commodities Markets Standards Board and International Organization of Securities Commissions, among others.

Companies have long been distorting the more commonly-known measure of Ebitda to increase revenue and earnings forecasts through what are called add-backs, much to investors’ dismay. Now they’re getting even more creative in including the effects of the coronavirus to show what their financial results could have looked like if not for Covid-19, which Knutson fears could become increasingly common as the second-quarter earnings season gets underway.

Outdoor furniture maker AZEK Co. for example, added a provision to a May bond offering that allows it to add back a certain amount of earnings lost due to the pandemic, without explaining how such a figure is determined. A representative for the Chicago-based company did not immediately reply to a request for comment.

Then there was Ohio-based packaging firm Greif Inc., which included $0.9 million of “incremental COVID-19 costs” when calculating its adjusted Ebitda figure in its June 3 results. “The adjustments provide a more stable and consistent platform for the investors to compare the historical performance of the company,” a spokesperson said in emailed comments.

Credit Roundtable isn’t the first to voice such concerns. The European Leveraged Finance Association, a group that represents more than 30 institutional fixed income managers, said the calculations could lead to “fictitious figures,” according to a May statement. Credit raters such as Moody’s and Fitch Ratings have also been critical, saying it’s “inappropriate” and “open to manipulation.”

“It’s essential to have accurate and transparent information about a company’s financials,” Knutson, who’s also head of credit research for the Americas at Schroder Investment Management, said in an interview. “There’s going to be an increasing desire to try to employ creative accounting because there’s a need.”

©2020 Bloomberg L.P.

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