Ratings agencies are set to downgrade more
US corporate bonds to junk status, increasing
funding costs for some companies just as
economic growth is slowing. In Q1 of 2023,
$11.4 billion of bonds were downgraded to high
yield status, 60% of the 2022 full-year total,
according to Barclays. The bank expects
between $60 billion and $80 billion of these
securities, known as fallen angels, in 2023,
reflecting pressure on many companies facing
rising borrowing costs as the Federal Reserve
increases interest rates. Corporations whose
bond ratings are cut to junk face even higher
funding expenses because a smaller universe
of investors is eligible to buy their bonds.
Barclays expects downgrades to junk status to
accelerate in H2 2023 as slowing economic
growth puts additional strain on blue-chip
borrowers. The bank expects about $60 billion
to $70 billion of “rising stars” this year, which
would be the second-highest total on record.
The pace of those upgrades is likely to slow in
the second half, the bank said.
The lion’s share of the fallen angel total came
from Nissan Motor’s $9.8 billion debt pile,
which S&P Global Ratings cut to speculative
grade in March. The list of fallen angels also
included two regional banks, First Republic
Bank and Axos Financial. The total loans on
banks’ books have declined by about $95 billion
since mid-March, according to data from the
Federal Reserve. Credit conditions are
generally getting tighter, which tends to spur
more ratings downgrades.
Declining profits are likely to eat into corporate
borrowers’ bottom lines and could hurt margins
for issuers more sensitive to changes in the
economy. Fitch Ratings expects a recession to
occur late in the third quarter.
As the dollar volume of fallen angels is rising,
downgrades are still relatively muted. The $60
billion to $80 billion of downgrades the bank
forecasts represent about 2.2% of BBB tier
corporate bonds, according to Barclays. The
average since 2000 is closer to 6.6%, the bank
said.
In summary, the increasing number of US
corporate bond downgrades to junk status is
set to further boost funding costs for some
companies as economic growth slows. Despite
this, some bonds are likely to be upgraded to
investment grade, according to Barclays. The
collapse of Credit Suisse and regional lenders
such as Silicon Valley Bank may also be
contributing to the decline in lending.
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