Credit rating agencies are upgrading hundreds of billions of dollars of US corporate debt, in a partial reversal of the downgrades at the outset of the pandemic that reflects the strong rebound in profitability across much of corporate America.
Roughly $361bn of higher-rated, investment grade bonds have been upgraded in the past two months, including a record $184bn in June, according to data from Bank of America.
The brisk pace shows credit rating agencies such as S&P Global, Moody’s and Fitch believe the economic recovery spurred by vaccine rollouts has made corporate debt piles more manageable. It also reflects the abundant liquidity and low borrowing costs available to many companies, in part thanks to monetary stimulus from the Federal Reserve.
“I don’t think you could have anticipated the vaccine, the economic growth, and the strong availability of really low-rated debt,” said Christina Padgett, senior vice-president of Moody’s Corporate Finance Group.
Rating agencies, which had been chastised after the 2008 financial crisis for giving pristine grades to bonds that ultimately defaulted, moved swiftly during the pandemic to downgrade their assessments on swaths of debt.
Ratings on nearly $1tn of US investment grade corporate debt were cut in March and April of 2020, the BofA data showed, out of about $7.6tn outstanding.
The US economy, which shrank 3.5 per cent last year, is forecast to grow about 6.6 per cent in 2021, according to a Bloomberg survey of economists. Profits for S&P 500 companies are projected to rise more than 60 per cent in the second quarter from the same period last year, when economic activity stalled, according to Refinitiv data collating analysts’ forecasts.
As prospects are improving for investment grade bonds, so too are those for riskier junk-rated companies. Analysts at Citigroup predicted $200bn of corporate debt will rise to investment grade by the end of 2022. Already, $18bn worth of junk debt has been lifted up the ratings ladder to investment grade so far this year, the bank’s data showed.
“It’s like something that I have not seen in my time [in the industry],” said Michael Anderson, a credit strategist at Citigroup. “After the financial crisis we didn’t get major companies moving back to investment grade so quickly.”
In recent months, junk-rated companies have enjoyed all-time low borrowing rates, and even cash-strapped groups have had access to capital to outlast a dip in earnings.
The pace of upgrades has drawn some criticism from analysts and investors who believe the cuts last year were a disproportionate response to the pandemic.
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“The wave of downgrades was probably too severe,” said Yuri Seliger, a credit strategist at Bank of America.
However, big rating agencies have rejected that notion, pointing out many countries suffered recessions last year. Emily Wadhwani, a senior director at Fitch Ratings, said they were “proactive in their ratings” as they pertained to the pandemic.
Strategists at Moody’s said that almost three-quarters of all downgrades at the outset of the health crisis affected companies that were already struggling, noting that liquidity concerns and vulnerable business models as a result of the pandemic were also drivers.
“None of us felt like in March, April, May [last year] that the market was going to come roaring back,” said Padgett, “and all these weakly positioned companies were suddenly going to have all the debt that they needed and then some.”