As the coronavirus outbreak rips through credit markets, US companies from Occidental Petroleum to Ford are being treated by investors as though they will soon lose their coveted top-quality credit ratings, sending their debt tumbling into the drawer marked “junk.”
A cut in rating below investment-grade — marked by the threshold between triple B and double B — indicates a stern warning from the likes of Moody’s and S&P Global for companies to improve their balance sheets. But even before such verdicts have been delivered, investors have been making up their own minds, marking down the value of bonds on the brink of a downgrade.
Close to $300bn of bonds rated triple B trade with a yield above 6 per cent, according to data from Ice Data Services released late last week. That is closer to the 6.2 per cent average yield for double B-rated companies than the 3.6 per cent average for the $3.3tn triple B-class as a whole. On top of that, there is another $230bn of triple B debt trading with a yield above 5 per cent.
Investors and policymakers have long warned of the risk of a rush of downgrades overwhelming the $1.2tn junk bond market and intensifying a sell-off.
“As the probability of a recession rises, so does the potential for downgrades and defaults, leaving us unwilling to wave the white flag for corporate credit,” said analysts at Wells Fargo on Friday.
The sharp spike in borrowing costs has raised concerns over the ability of some companies to continue to service their debts.
Triple B-rated Delta Air Lines’ bond maturing in 2021 is trading with a yield of 7.9 per cent, for example. Carmakers Ford and General Motors also have debt trading above 7 per cent.
Travel and hospitality sectors have come under pressure, with Royal Caribbean Cruises put on watch for a downgrade by S&P Global in the past week.
Many energy companies also face potential cuts in ratings, including Occidental Petroleum, which last week tried to shore up its balance sheet by slashing the dividend it pays to shareholders. S&P said that this might not be enough to preserve its triple B rating.