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Company Debt in Europe Will Slide to 1996 Low: Chart of the Day

European corporate indebtedness will slide to the lowest level in 16 years in 2012, a signal that the two-year-old rally in the region’s stocks will extend its gains, according to Societe Generale SA.

The CHART OF THE DAY shows how the benchmark Stoxx Europe 600 Index has entered two bull markets in the last decade, from 2003 to 2005 and since the end of 2009, as its constituent members lowered a measure of their indebtedness. Companies’ net debt as a proportion of earnings before interest, taxes, depreciation and amortization will fall its lowest level since 1996 next year, according to Societe Generale.

“Companies having had a near death experience want to deleverage and this may continue for another year or so,” said Andy Lynch, who manages about $1.9 billion at Schroder Investment Management Ltd. in London. “We are seeing a swing back to sensible levels. It’s good for systemic stability of the economy if you have fewer companies that are deeply indebted.”

The ratio of European companies’ debt to Ebitda will fall to 0.8 in 2012, according to Societe Generale. The last time that corporate debt dropped below Ebitda, European stocks rallied 154 percent over the following five years.

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