FRONT STORY US
Blue-chip borrowing costs may rise
Loans to Triple B firms now account for half of the high-grade sector
Several acquisitive investment-grade companies have not deleveraged as promised
US blue-chip companies that have been
racking up record debt to fund strategic
acquisitions and share buybacks could face
higher borrowing costs, as they are
vulnerable to being downgraded to junk
status in the next economic slump.
Loans to US corporations that are rated in
the Triple B or Baa categories - the lowest
levels on the investment-grade rung - now
account for about half of the high-grade
sector, up from a third a decade ago, after
this debt spree. The amount of debt that US
corporate borrowers are carrying on their
balance sheets is at an all-time high,
according to rating agency S&P.
“While credit conditions are very good,
leverage is high and will only go higher in a
stressed environment. We may see more
fallen angels in the next downturn, meaning
low investment-grade companies moving to
non-investment-grade,” said Mariarosa Verde,
SENIORûCREDITûOFlCERûATûRATINGûAGENCYû-OODYS
Fallen angels are investment-grade
companies that sink to speculative-grade, or
junk, ratings that raise the cost of borrowing
due to higher default and credit risks.
!MONGû53ûNON
lNANCIALûCOMPANIES ûû
of Triple B debt is now leveraged at or above
four times Ebitda because of high debt
growth, Morgan Stanley analysts wrote.
Median leverage for these investment-grade
rated companies is 2.55 times, compared
WITHûûTIMESûFORû3INGLEû!ûRATEDûBORROWERS
Although several large companies
including global brewer ANHEUSER-BUSCH INBEV
and GENERAL ELECTRIC are on the watchlist, a
crush of ratings cuts to speculative-grade
rankings is unlikely in the near term,
analysts, investors and bankers said.
The decade-long economic rebound still has
room to run, and US companies are generally
in a better position after tax reform cut rates
and made it easier to access overseas cash.
Drawn spreads on Triple B rated
INVESTMENT
GRADEûLOANSûAVERAGEDûBPûOVERû
Libor in the third quarter, the lowest since
BPûINûTHEûSECONDûQUARTERûOFû ûANDû
SHARPLYûBELOWûTHEûPEAKûOFûBPûINûTHEû
SECONDûQUARTERûOFû ûACCORDINGûTOû,0#ûDATA
Most loans for highly rated companies are
revolving credits which are undrawn.
5NDRAWNûLOANSûAVERAGEDûBPûINûTHEû
third quarter, and have held in a narrow
band for several years.BBB CAUTIOUS
Several acquisitive investment-grade
companies have not deleveraged as promised,
leaving banks with more exposure than
anticipated in low-priced acquisition loans.
!NHEUSER
"USCHû)N"EVûCAMEûUNDERûlREû
AFTERû-OODYSûTHREATENEDûTOûLOWERûITSû!û
rating by up to two notches unless it can
provide a credible plan to reduce leverage
more quickly after its SABMiller acquisition.
That follows the shock downgrade of FORD
INûLATEû!UGUSTûWHENû-OODYSûCUTûTHEû
CARMAKERSûRATINGûBYûONEûNOTCHûTOû"AA ûTHEû
lowest investment-grade ranking. S&P also cut
'ENERALû%LECTRICSûRATINGûBYûTWOûRUNGSûTOû"""
h7EREûWATCHINGûTHESEûLARGEû4RIPLEû"û
complexes very, very closely to ensure that
their objectives around deleveraging are
being met,” said a senior banker, referring
to recent debt-backed mega mergers
including telecoms giant AT&T with media
company TIME WARNER and drugstore chain
CVS with health insurer AETNA.
Some investors cannot buy leveraged
loans or bonds from highly indebted
companies, which carry more repayment
risk. Investors that can hold that paper will
be calling for increased returns as
compensation.
“My concern is less about a big wave of
DOWNGRADES ûANDûITSûMOREûTHATûINûTHEû
shorter run you could see credit spreads
widen out a little bit because of the level of
supply from BBBs,” the banker said.
h"UTûOVERALLûTHERESûAûFAIRûAMOUNTûOFû
optimism about the economy, where banks
and credit investors feel like the cycle still has
SOMEûTIMEûTOûRUN ûANDû)MûNOTûHEARINGûAûLEVELû
of concern that would persuade underwriters
from not underwriting new business.”
Sub-investment-grade markets have
shown that they are able to absorb massive
supply, even for issuers with aggressive
borrower-friendly terms on their debt.
Fallen angel TEVA PHARMACEUTICAL, which
loaded up on loans and bonds as an
INVESTMENT
GRADEûCOMPANYûFORûITSû53BNûACQUISITIONûOFû!LLERGANû'ENERICSûINû*ULYû û
TAPPEDûTHEûJUNKûMARKETûFORûTHEûlRSTûTIMEûINû
-ARCHûWITHûAûBIGGERûTHANûEXPECTEDû53BN
equivalent deal. Based on strong investor
demand, Teva was able to lower yields from
initial price talk on its high-yield bond debut.
“We are not overly concerned that in a
recession the Triple B downgrades will
overwhelm the high-yield market,” said
David Brown, co-head of global investment
grade at Neuberger Berman.SELF CONTROL
A shift in the make-up of Triple B credits
could mitigate downgrade fallout, however,
as the economic cycle plays out.
In the last economic downturn, Triple B
rated companies were highly cyclical, and as
AûRESULTûCASHûmOWSûSANKûFORûSECTORSûINCLUDINGû
autos, metals and mining, chemicals and
energy, said Brown.
“Now the Triple B sector is dominated by
companies with a high amount of leverage,
but they are economically defensive -
pharmaceutical and healthcare, telecoms,
midstream, cable and food and beverage,”
he said. “These sectors are characterised by
HIGHûLEVELSûOFûFREEûCASHûmOWûANDûLOWûLEVELSû
of economic cyclicality.”
Ongoing economic growth in the US and
the low corporate tax rates are also helping to
moderate concern about mass downgrades.
h7EVEûHADûAûMEANINGFULûSTIMULUSûTHATûISû
BEARINGûFRUITû7EûAREûSEEINGûGOODûPROlTû
growth and still have very strong liquidity,
which are supporting and sustaining
corporate credit quality,” Verde said.
Determining to use available cash to step
up debt repayment could help companies to
AVOIDûFALLINGûINTOûJUNKûSTATUSû#OMPANIESû
could also choose to reduce their debt with
asset sales of non-core divisions.
h)TSûPOSSIBLE ûNOWûTHATûINTERESTûRATESûAREû
RISING ûTHATûTHEYûMAYûDEVOTEûMOREûCASHûmOWû
to debt reduction rather than shareholder
initiatives,” said Verde. “At the investment-
grade level companies are, to a large extent,
masters of their own destinies in that they
have the capacity to reduce leverage.”
Lynn Adler
(Additional reporting by Yun Li)LOANS
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