Mar 25, 2020, 18:21 pm
Multiple experts said during the record-long economic expansion that highly indebted companies would face a major stress test in a downturn.
The coronavirus pandemic has now brought about a sudden global contraction that one expert thinks may even devolve into a depression.
As such, credit strategists at UBS said that more than $1 trillion in corporate debt may be distressed. This means the companies — representing about 13% of the about $8 trillion corporate-credit market — are at risk of defaulting or seeking bankruptcy protection.
Alarm bells about leveraged loans were blaring long before the coronavirus crisis hit. The market, which services companies with non-investment-grade ratings that would otherwise struggle to secure lending, ballooned from $497 billion in 2010 to more than $1 trillion in 2019.
Investors were rewarded for their risk-taking with the highest yields for any fixed-income asset relative to its market value after the financial crisis, according to data compiled by Goldman Sachs.
However, the economic recession will stress these companies' balance sheets and test investors' appetite for their risk-laden yields. According to the chart below, investors are already repricing the risk.
Junk bonds are not the only securities at risk. S&P Global Ratings has said the coronavirus crisis could increase the number of so-called fallen angels: companies with the lowest investment-grade rating, BBB, that are downgraded to junk territory.
Rating agencies have already swung into action with warnings and downgrades on companies most exposed to disruptions caused by the coronavirus. S&P cut Delta Air Lines to junk on Tuesday, adding the firm to a list of demoted carriers that includes JetBlue Airways and Spirit Airlines.
The downgrades are likely to affect companies beyond the travel industry.
His concern is partly why the Federal Reserve threw a lifeline to credit markets by pledging $200 billion in corporate-debt purchases. Half the massive aid unleashed on Monday will be directed at buying directly from companies in primary markets, while the other half will include exchange-traded funds that track investment-grade bonds.
For Mish, this kind of intervention could lessen the risks of severe illiquidity and a widespread crunch in speculative credit.
The full impact of the Fed's actions remain to be seen. And in the interim, Mish has used leveraged-loan data to estimate how exposed various industries are to the coronavirus pandemic.
He listed sectors and their levels of exposure to the coronavirus crisis (low, medium, and high) based on UBS's own assessment and Moody's scoring. The sectors below were classified as low and high exposure by both UBS and the rating agency.
High exposure: Air transport, automotive, hotels/motels/inns and casinos, leisure, rail industries, and surface transport.
Low exposure: Telecommunications and utilities.
https://www.businessinsider.com/coronavi...ubs-2020-3
The coronavirus pandemic has now brought about a sudden global contraction that one expert thinks may even devolve into a depression.
As such, credit strategists at UBS said that more than $1 trillion in corporate debt may be distressed. This means the companies — representing about 13% of the about $8 trillion corporate-credit market — are at risk of defaulting or seeking bankruptcy protection.
Quote:"Our biggest concern by far regarding downside risks in corporate credit has been leveraged and middle-market loans," Matthew Mish, UBS's head of credit strategy, said in a recent note.
Alarm bells about leveraged loans were blaring long before the coronavirus crisis hit. The market, which services companies with non-investment-grade ratings that would otherwise struggle to secure lending, ballooned from $497 billion in 2010 to more than $1 trillion in 2019.
Investors were rewarded for their risk-taking with the highest yields for any fixed-income asset relative to its market value after the financial crisis, according to data compiled by Goldman Sachs.
However, the economic recession will stress these companies' balance sheets and test investors' appetite for their risk-laden yields. According to the chart below, investors are already repricing the risk.
Junk bonds are not the only securities at risk. S&P Global Ratings has said the coronavirus crisis could increase the number of so-called fallen angels: companies with the lowest investment-grade rating, BBB, that are downgraded to junk territory.
Rating agencies have already swung into action with warnings and downgrades on companies most exposed to disruptions caused by the coronavirus. S&P cut Delta Air Lines to junk on Tuesday, adding the firm to a list of demoted carriers that includes JetBlue Airways and Spirit Airlines.
The downgrades are likely to affect companies beyond the travel industry.
Quote:"Our near term estimations of distressed debt near $1.08tn, coupled with $0.63bn of fallen angel risks looming over credit markets, underscores the severity of the risks in broader credit markets," Mish said.
His concern is partly why the Federal Reserve threw a lifeline to credit markets by pledging $200 billion in corporate-debt purchases. Half the massive aid unleashed on Monday will be directed at buying directly from companies in primary markets, while the other half will include exchange-traded funds that track investment-grade bonds.
For Mish, this kind of intervention could lessen the risks of severe illiquidity and a widespread crunch in speculative credit.
The full impact of the Fed's actions remain to be seen. And in the interim, Mish has used leveraged-loan data to estimate how exposed various industries are to the coronavirus pandemic.
He listed sectors and their levels of exposure to the coronavirus crisis (low, medium, and high) based on UBS's own assessment and Moody's scoring. The sectors below were classified as low and high exposure by both UBS and the rating agency.
High exposure: Air transport, automotive, hotels/motels/inns and casinos, leisure, rail industries, and surface transport.
Low exposure: Telecommunications and utilities.
https://www.businessinsider.com/coronavi...ubs-2020-3