Even before the pandemic, defaults by
junk-rated companies were on the rise.
Now credit raters expect them to surge.
Here Come the Defaults
Credit Ratings Slashed
Credit-ratings companies are slashing their grades at the fastest pace in more than a
decade, with an increasing number of corporate bonds being cut to junk. In March large
caps such as Ford Motor Co. and Occidental Petroleum Corp. saw their ratings cut.
Standard & Poor’s U.S. Corporate Ratings Changes
The virus and its fallout spurred
an exodus from debt mutual funds and
exchange-traded funds.
Investors Flee
Weekly U.S. Net Flows of Debt Funds
Little Margin for Error
Much of the recent borrowing funded acquisitions, leaving companies with high
leverage. But they also used creative accounting to juice earnings projections,
potentially masking the true risk of an economic headwind such as they face now.
Leverage and Fuzzy Math in Loan-Funded Acquisitions and Buyouts
Quarterly
Accounting adjustments as a share of Ebitda*
in U.S. leveraged loans that finance M&A
Leverage of
companies
after
acquisitions,
as a multiple
of Ebitda
Q1 ’10 1/2/20
0.7
- 2
Q1 ’20 3/25/20
600 -40
-20
300
0
300
0
$20b
6x
4
2
4Q ’15 4Q ’19
Global Speculative-Grade Default Rate
Monthly
Actual rate
One-year forecasts, by macroeconomic scenario:
Short, sharp downturn
Conditions similar to 2008
Severe recession
Financial crisis
5
10
20%
15
0
2/2008 2/2021
Upgrades Downgrades Investment-grade High-yield
Ratio
Inflows
Outflows
0
VOLUME 29 / ISSUE 2 57