A backlash is growing among regulators and participants in the junk-bond market against the new accounting practices of the pandemic that obscure the virus’s impact on businesses.
Q1 2020 hedge fund letters, conferences and more
Moody’s Investors Service is the latest organization to speak out against a financial contortion known as earnings before interest, taxes, depreciation, amortization and coronavirus -- or Ebitdac, as opposed to the usual Ebitda. This week the ratings firm issued a report that said Ebitdac probably includes “a number of hypothetical and highly subjective adjustments.”
Moody’s criticism follows similar comments last month from a group of high-yield investors that said using Ebitdac is “inappropriate” and could lead to “fictitious figures.”
Regulators are also running out of patience with the practice.
Europe’s top markets watchdog, the European Securities and Markets Authority, called for “caution regarding any separate presentation of the impacts of the Covid-19 pandemic in issuers’ profit or loss statement,” according to a report on May 20.
Highly Subjective
The Financial Reporting Council, which regulates U.K. auditors and accountants, also expressed concern, warning that alternative measures of financial performance which attempt to show “normalized” results are likely to be “highly subjective” and “potentially unreliable.”
The debate is reminiscent of previous resistance by investors to adjustments to Ebitda, known as “add-backs,” because they make companies look more creditworthy by increasing revenue and earnings. Adapting the numbers to include earnings lost to the virus goes a step further.
“It’s absolutely unacceptable behavior,” said Tatjana Greil Castro, a portfolio manager at Muzinich & Co Ltd. in London. “You can’t wish everything away that doesn’t suit you.”
U.S. packaging firm Greif Inc., German beauty retailer Douglas and Spanish gaming company Cirsa all included Ebitda adjustments for the coronavirus pandemic in recent weeks. The companies also reported separate Ebitda figures free of adjustments.
Read the full article here by Katie Linsell, Olivia Konotey-Ahulu, Advisor Perspectives
