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Avalanche of Downgrades Points to a ‘Big Default Spike’, Moody’s Warns
A record number of risky borrowers face debt maturities.
The number of companies with low credit ratings has soared past levels seen at the peak of the last financial crisis, as borrowers become stressed in the coronavirus pandemic, according to Moody’s Investors Services.
Borrowers rated six or more levels below investment grade with a negative outlook now total 311, Moody’s reported April 3. That’s about 7 percent larger than the pool of vulnerable companies at the height of the financial crisis in 2009.
“Defaults will rise fast as the coronavirus pandemic unleashes economic and financial turmoil around the world,” Moody’s said in the report. “More vulnerable companies will find credit market access elusive just as they attempt to finance upcoming maturities and other needs.”
Credit markets froze last month as investors’ fears over the coronavirus intensified, although Bank of America Corp. said April 3 that markets had “reopened slightly” for new high-yield deals. Speculative-grade companies face a total $106 billion of debt maturities this year and next, Moody’s said, as the U.S. continues to battle the novel coronavirus through social distancing.
Businesses and schools in New York, the epicenter of the global pandemic, will remain closed through April 29, New York Governor Andrew Cuomo announced Monday during a press briefing. The extended order to practice social distancing prioritizes lives over economic activity, he said, expressing concern that hospitals and health-care workers are overburdened.
“If we are plateauing, we are plateauing at a very high level,” Governor Cuomo said. “Staying at this level is problematic.”
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Turmoil stemming from the pandemic harms companies across industries, Moody’s said, but particularly consumer products and proteins, automotive, energy, and health care. Retail, apparel, and restaurants are also highly stressed, the firm reported.
Private equity-owned businesses account for a significant portion of the credit rater’s B3 “negative” list, prompting Moody’s to warn in late 2018 that buyout firms would make the next downturn worse. Private equity managers finance their purchases of companies with high-yield bonds and loans in order to increase their returns, making it harder for the businesses to navigate tough times.
“A sharp rise in volatility, risk aversion, and the shutdown of the high yield capital markets led to the U.S. speculative-grade corporate universe getting deluged with 84 liquidity downgrades,” Moody’s said in its April 3 report.
High-yield bonds lost 13 percent in the first quarter, the biggest drop since losing 18 percent in the fourth quarter of 2008, according to Bank of America. Energy debt investors saw particularly large losses, with junk bonds in the sector losing 40 percent.
The energy sector, which was under pressure in 2015, is “once again on the front line of losses as oil prices have plummeted,” Moody’s said. “Many vulnerable, lower rated, highly leveraged companies will continue to succumb to performance woes and high leverage, which will push the default rate sharply higher by the end of the year.”