The
credit-rating agencies have noticed the rapid economic collapse caused by the
coronavirus and are now pushing many large companies over the edge from BBB
(the lowest level of “investment grade”) into lower tiers. Since the beginning
of February, U.S. corporate debt with a face value of about $120 billion has
been downgraded to “junk” status. These handful of so-called fallen
angels, including Ford Motor, Kraft
Heinz, Occidental
Petroleum, and Macy’s, are
having a big impact on the overall high yield market.
That's because
investment-grade issuers structure their borrowing differently than the
lower-rated borrowers used to paying high prices for bond financing,
as Barron’s Alex Scaggs explains:
As a general rule, it is easier for
higher-rated companies to sell longer-dated debt, because investors are willing
to lend to them for longer periods of time. Maturities and durations of
investment-grade bonds are greater than those of junk-rated debt; the
investment-grade bond index’s maturity is 11 years, while the maturity of the
high-yield index is six years, according to ICE BofA Indices.
So when investment-grade companies get
downgraded to junk, joining the ranks of firms known as “fallen angels,” they
bring more long-dated debt into the high-yield bond market with them.
Kraft Heinz (ticker: KHC), for example, has
$9.3 billion of bonds maturing in 20 years or longer. When it joined the
high-yield bond index at the start of March, it single-handedly more than
doubled the duration of the high-yield food, beverage and tobacco sector.
Expect this
process to continue.
No comments:
Post a Comment