2020-04-01 Bloomberg Markets Magazine

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

0. 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