▲ Wuchang train
station on Feb. that have been hit by the virus, reversing course on
the need for economic stimulus.
There are about $1.3 trillion in high-yield bonds
outstanding, up from $786 billion a decade ago.
The investment-grade credit market has more
than doubled, to $6 trillion, in the same period.
Almost half the investment-grade bond mar-
ket is now rated BBB, which means it could be
downgraded to junk levels if the economy falters.
Should that happen, many investors would need
to sell the debt to comply with restrictions on the
quality of their holdings.
● Who’s at risk
this time?
In the $1.15 trillion leveraged loan market—where
companies already carrying a lot of debt accu-
mulate more—borrowers have used adjustments
to their earnings to reduce their apparent level
of indebtedness. A downturn could expose their
weakness. Analysts at Barclays Plc estimate that
buyers of U.S. leveraged loans will be able to
recover only 55¢ to 60¢ on the dollar, compared
with 67¢ historically, because of companies’ dubi-
ous earnings math and rising debt loads.
With broad financing markets shut for now, des-
perate companies are turning their attention to the
$812 billion private-credit market. In times of stress,
these lenders—private equity firms and others—
often step in to provide financing to borrowers
that would otherwise have to go without, at a cost.
But that might not be a cure-all. A slowdown in
consumer and business spending could be partic-
ularly damaging for broadly syndicated loans and
private credit, much of which is debt rated B and
below, according to UBS Group AG credit strategist
Matthew Mish. That debt is among the riskiest in
the high-yield market because downgrades can put
it in CCC, the lowest tier.
“Companies with vulnerable balance sheets—
meaning little cash, high maturing debt—are
going to have difficulty refunding themselves,”
Mohamed El-Erian, chief economic adviser at
Allianz SE, told Bloomberg Radio on March 9.
“There is going to be an increase in credit
defaults.” �Rich Miller and Claire Boston, with
Kelsey Butler and Davide Scigliuzzo