As interest rates ease and the potential for market breadth returns in 2026, opportunities should expand for companies that have been perceived as overlevered
It’s no surprise that levered small and mid-cap (SMID) stocks have sat in purgatory over the last few years given the volatility we’ve seen in interest rates and overall sentiment in the global economy. From our conversations with the Street, while 3-4x leverage was considered tenable pre-COVID, many investors now struggle to sleep at night when they own stocks carrying leverage ratios of 2-3x. To provide some perspective, Alpha’s research team developed the chart below showing the chasm in price performance for smaller companies carrying excess leverage:
*Note: Small-cap indices exclude regional banks and specialized financial services entities.
As the data shows, it’s been a “risk off” environment for small- and mid-sized stocks that employ reasonable-to-high debt levels. In fact, levered SMID-cap companies clearly hindered the performance of the Russell 2000, as those with little to no leverage (less than 2x) outperformed the small-cap index over this three-year period.
The reality has been that market breadth has been non-existent for companies that aren’t in the AI/Data Center space or one of the top global tech companies over the last three years. However, there are encouraging signs that the IPO market is springing back to life, and Alpha’s research team believes that 2026 will start to see a more “risk on” environment. This should open the door for many small- and mid-sized stocks, but those that remain reasonably levered still need to think more proactively about their messaging and IR programs.
IR Positioning & Messaging Considerations
Given our long history supporting SMID-cap stocks, including those with various degrees of leverage, we wanted to offer some messaging framework advice for levered companies as they start planning their 2026 IR programs.
1. Openly Embrace the Differentiated Risk/Reward Profile as an Opportunity (i.e, an "Equity-Enhanced Yield")
- Frame an investment in the stock like a high yield debt instrument – offering equity-like upside combined with bond-like return characteristics, along with the downside protection based on cash flow resilience.
- Specifically, acknowledge that your stock carries a differentiated, higher risk profile given the more complex balance sheet and capital structure, but with a higher risk-adjusted return profile that can drive portfolio alpha for the investor.
- Next, frame how any planned capital returns to shareholders (dividends, share repurchase activity), further de-risk the downside, acting like coupon payments that compensate the portfolio as you wait for the equity to re-rate.
- Then as you progress through the deleveraging process, begin to translate the bond pitch (current dividend/FCF yield, relative value) into language that focuses on the implied upside to the equity value, once it is unconstrained by a higher debt burden. This anchors the possibility of valuation multiple expansion as your company’s leverage and balance sheet improve over time.
- These concepts will particularly resonate with special situation investors that often begin their focus on the debt side and shift through time towards supporting the equity as your strategy takes hold.
2. Reorient Investor Messaging to Focus on Cash Flow Stability & Debt Service/Coverage
- It’s also critical for levered companies to learn to balance the IR & communication needs of both creditors and equity holders; this can be achieved through some simple tactics:
- Consistently highlight Adjusted EBITDA, cash flow from operations, and free cash flow (i.e., make sure investors understand cash flow conversion and working capital needs).
- Emphasize longer-term cash flow visibility, recurring revenues, contracted backlog, and everything that brings stability to your balance sheet.
- Always include debt service coverage ratios (trailing EBITDA relative to interest payments).
- All of these serve to de-risk forward expectations and build confidence in your company’s future earnings power.
3. Clearly Articulate a De-Levering Pathway & Expected Timeline
- Special situation investors and those that invest across the full capital structure will want to hear near-term debt reduction expectations and long-term leverage targets (i.e., specific leverage numbers on a net and gross basis, and key milestones along the path to reaching the targets).
- Investors will also demand greater detail on organic growth, cost control actions, capital allocation objectives, or potential non-core asset sales/divestitures that can accelerate debt reduction and cut down balance sheet risk.
- Note that these de-levering pathways and strategic actions that support them will need to resonate as credible and achievable and remain in harmony with growth plans to preserve the equity upside over the long term.
4. Employ & Message a "High Credit Quality" Mindset
- We advise our clients to show investors that the company is behaving like an issuer that expects to return to and maintain an investment grade rating in the future. This is most effectively achieved by messaging around core concepts like:
- Disciplined capital allocation – intelligently investing your cash flows.
- Prudent liquidity management – maintaining strong cash reserves or access to liquid resources via credit.
- Defensive operating posture – speaking to the underlying resilience of operations, especially during downturns or cyclical lulls.
IR Tactical Considerations
Beyond the strategic positioning and messaging considerations outlined above, we also want to stress some critical tactical needs to consider as you outline your go-forward IR strategy.
5. Identify the Investors that Want to Own Companies Like You
- Make sure your investor targeting plan includes the types of investors who would look to own a leveraged SMID-cap.
- Understand that despite being too risky for certain institutional investors and large fund families, there are others with investment mandates that look to specifically own the risks you present. These include: cross-capital structure or multi-strategy hedge funds, traditional high-yield credit investors, insurance investment managers, and turnaround funds.
- To increase the number of opportunities you will have to connect with these investors, consider attending leveraged finance or high yield credit conferences sponsored by sell-side banks, even if you do not expect to be back in the debt capital markets in the near term.
6. Create a Tactical Presentation Style for Your Investor Materials
- Use bond market language in all your IR materials and create optionality when talking with various investors. In other words, be ready and able to pivot your message to special situation investors versus pure equity players.
- For example, within your materials aim to utilize phrases like “coverage ratios,” “liquidity runway,” “secured assets,” “maturity profile,” “downside protection,” “non-cyclical cash flows,” and “capital structure optimization.”
- When possible, include a downside analysis (i.e., what happens to cash flows in a recession or weaker part of the cycle) in your investor presentation to show how even in a stressed environment, your business covers debt service and generates cash returns.
- This ensures you communicate business defensibility across different market scenarios and shows that your company can continue allocating available capital toward growth opportunities.
- Provide recovery value estimates if the business went through distress — bond investors will appreciate understanding “recovery rates.”
7. Align Management & Board Expectations
- Leverage is clearly a hurdle that decreases some companies’ investability and thus their investor pool. As a result, it’s critical to make sure the C-suite and your board of directors understand that your stock is likely to perform directionally in-line with the riskier debt issuances in your capital structure.
- Thus, we suggest the IR team should temper expectations that small incremental improvements in leverage are not likely to re-rate the stock in the short term, but that continued progress will methodically create equity value ahead of major de-leveraging events.
- For internal communications, compare or overlay any equity market performance to those of similarly leveraged companies, as well as the absolute return on benchmark high yield indices.
Conclusion
You don’t want to be caught flat-footed when the investment tide turns and investors return to SMID caps. Alpha brings the experience and resources to help you turn what looks like a disadvantage into an opportunity. Our background in capital markets, as well as our depth in communications, provides the key elements to design an effective IR strategy for companies that have been “left out” of the market rally over the last five years.
To close, here are some suggested talking points that we keep at the ready. Many are worth consideration if your company is currently highly levered:
- “We are a high-return opportunity for investors willing to accept a measured level of risk; our return opportunity is supported by robust cash flows and a clear path to de-leveraging.”
- “Our equity market value reflects higher balance sheet risk, and also a huge value unlock as we execute.”
- “Our cash flows are durable, diversified, and sufficient to service obligations, while allowing for excess cash resources to be invested for growth.”
- “We are committed to a clear deleveraging path, targeting [X]x Net Debt/EBITDA by [Y] time. We have an achievable debt reduction plan, and executing will create significant shareholder value.”
- “Our management philosophy is rooted in preserving and growing stakeholder value through credit discipline. We are aware of our balance sheet constraints, and act accordingly to protect shareholder value.”
- “At current valuations, our stock offers a high-yield bond-like income profile with additional upside optionality through strategic growth. The downside is de-risked, and the upside improves further as we execute our strategy.”
