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Ratings Agencies Say Fed Action Not Enough to Stop Coming Wave of Defaults

By:
Chris Gaetano
Published Date:
Mar 31, 2020
Credit rating agencies Moody's said in recent reports that while the recent actions undertaken by the Federal Reserve will certainly help the economy, they won't be enough to hold back a coming wave of defaults sparked off by the global pandemic.

Moody's, in its most recent credit outlook (you'll need to register to view the report), said that business activity, already in a tailspin, will likely see a sharp fall in the first half of the year. While recent actions by the Federal Reserve have served to increase liquidity in the market, the report says that the long-term outlook for credit markets remain grim. The rating agency expects corporate defaults to rise as the global pandemic continues to devastate the economy, and it has already revised its previous projections in response. While in February, it projected default rates on speculative grade debt to be 3.6 to 8 percent, depending on macroeconomic conditions, its most recent report has edged those figures up to 6.8 percent in the case of a short, sharp downturn, 16.1 percent in the event of 2008-like conditions, and 20.8 percent in the event of a recession even more severe. The current default rate is 3.1 percent. While these percentages apply only to riskier companies, as speculative grade debt is rated lower than investment-grade, Moody's assessment of the Fed's actions noted that the ones that stand to benefit most from the central bank's intervention will be higher-rated companies that likely don't need credit as much. 

Moody's is taking these projections to heart, as its ratings news announcements over the past few weeks have become a parade of downgrades, knocking company after company into negative outlooks. Even the recent debt issuance by Yum Brands wasn't enough to impress, as Moody's announced yesterday that it was downgrading the firm's outlook to negative.

Fitch, too, is seeing bad signs in credit as, according to CFO.com, it lowered its outlook on the consumer finance sector. While forebearance policies on debt payment from both governmental and corporate entities can hold off defaults for a while, once the emergency is over, it is predicting that consumers will have a great deal of difficulty paying off personal debt like credit cards.

At least one credit hedge fund is getting scared amid these conditions: The Wall Street Journal said that Hedge fund EJF Capital LLC recently told clients that they will not be able to withdraw their money for the time being. While the move angered investors, the hedge fund said it did not want to sell in a credit market that it has deemed dysfunctional. It will be reassessing this decision every quarter, likely waiting for a time when the markets are not quite so frightening.

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