More US high-grade borrowers at risk of downgrade as economy slows

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A growing share of the $8.9 trillion U.S. high-grade corporate bond market is at risk of downgrading to junk status, with rating agencies forecasting downgrades that exceed upgrades for the first time since the end of 2021.

The proportion of lower-quality investment-grade bonds that rating agencies have in what is called a “negative watch” or “negative outlook” — meaning their ratings are likely to be downgraded — was 5.7 percent this week, according to the analysis. by BofA Securities, including names such as Paramount Global and Charter Communications. This is equivalent to double the level of 2.9 percent at the beginning of this year.

In contrast, the percentage of these bonds on “positive watch” — meaning they are more likely to be upgraded — was 5.3 percent, down from 7.9 percent in early January.

While the share of bonds at risk of downgrade is still relatively small compared to the total, this shift highlights the challenges facing the pocketbooks of American companies as… – Economic growth slows more than expected This year in the face of rising borrowing costs.

Bank of America noted that although investment-grade credit fundamentals are “generally strong, there is a risk of a downgrade.” [of some bonds] The high yield has increased recently.”

The broad shift in rating dynamics comes after a year in which upgrades from junk to investment grade – known as “rising stars” – significantly outpaced moves in the opposite direction – or so-called “fallen angels” – as the US economy defied recession fears to rank lower. It is the fastest growing advanced economy in the world.

Goldman Sachs data shows the rising stars’ net worth totaled $119 billion in 2023, the highest number in records dating back to at least 2010.

By comparison, the net worth of this year’s rising stars is just $20 billion, according to Goldman figures, suggesting a normalization away from massive amounts of promotions.

A line graph of bonds as a share of the broader index (%) shows that more Triple B bonds have an outlook

What helps push the larger share of bonds in light of negative expectations compared to positive expectations this year is the presence of a number of major companies that have large amounts of borrowing. BofA highlights Paramount and Charter as two such names.

The bank’s strategists noted that Boeing, which has a capital structure of $46 billion, was recently downgraded to the lowest investment grade and placed on a negative outlook by Moody’s. However, the Bank of America analyst sees the downgrade to risk as a “low probability event.”

“The negative outlook reflects the material degree of execution risk in Boeing’s plan to restore compliance and higher quality of its commercial aircraft assembly operations,” Moody’s said in April.

Large amounts of new bonds entering the high-yield market can cause changes in pricing, leading to higher spreads—the premiums on government yields that borrowers pay to issue debt. Right now, the entire Double-B universe is worth just $667 billion, according to Ice BofA data, down from an unprecedented peak of more than $830 billion in late 2021.

However, investor demand for credit has been particularly strong this year. Cash-laden buyers, eager to secure attractive yields before the Federal Reserve begins cutting US interest rates from their current 23-year highs, are stepping out of the margins to snap up corporate paper.

Analysts noted that this means that any new offer will be absorbed more easily than it would be in less favorable market conditions.

“Normally, when there is a significant downgrade in credit ratings, it is negative for spreads,” said Yuri Seliger of Bank of America. But this time, “maybe it won’t be as bad as before.”

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