When massive crdit restructuring occurs
After the 1990/91 recession the US corporate sector underwent a period of massive restructuring. Balance sheet repair, rights issues to repay debt, asset disposals and measures to improve cash flow generation led not only to falling leverage, but also to low earnings growth rates. During this first phase of the debt–equity cycle, the ‘repair phase’ credit usually outperforms equities. It lays the foundation for higher growth rates due to an improved ability to generate cash flows. The subsequent recovery period is beneficial for equity markets as well as credit markets, as the years 1994–97 have shown.
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