Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

Trouble Brewing in Corporate Bonds as Coronavirus Slams Economy

Chris Gaetano
Published Date:
Mar 11, 2020
While fluctuations of the stock market have grabbed most of the headlines, the corporate bond market has begun to send some dire warnings, especially after this week's oil rout. 

Barron's said that corporate debt on Monday had its worst day since 2008, driven by a mass sell-off of BBB-rated bonds, close to the lowest possible grade a bond can receive before being considered junk. This low-quality debt makes up about half of the entire corporate debt market, a product of central bank policies around the world sustaining historically low interest rates for historically long periods. A report from the IMF last year said the fact that borrowing has become so easy has encouraged risky behaviors such as mergers and acquisitions and investor payouts. Beyond even risky actions, the IMF also pointed out that the borrowers have become riskier as well, saying that there are rising loans to BBB-rated bond issuers and leveraged loan borrowers. 

While the aforementioned easy-credit environment has allowed companies to maintain business as usual, even in these conditions, the report says that, "in a material economic slowdown scenario, half as severe as the global financial crisis," the amount of debt-at-risk (defined as debt owed by companies whose earnings are insufficient to cover interest payments) would amount to $19 trillion, or roughly 40 percent of all global corporate debt. When aggregated down to individual countries, the IMF said that certain areas have at-risk debt levels equal to, or even beyond, those prior to the financial crisis. 

Signs of a faltering corporate debt market have been appearing even before the coronavirus outbreak came to dominate news headlines. Many firms with lower credit ratings, generally in the subprime territory, began experiencing financial distress caused partially by changing business conditions (such as a landline phone company facing competition from mobile devices) but also by a wave of credit downgrades. For instance, in that time, the number of loans downgraded by S&P Global Ratings outpaced upgrades over the past three months by the largest amount in a decade. This has had the effect of increasing borrowing costs on firms that, by and large, have come to rely on cheap credit. And this was all before the coronavirus. After the virus? 

The New York Times is reporting that the mass offloading of risky debt in favor of safer Treasury Bonds has placed stress on companies that had previously been able to survive by continually drawing on credit. With fewer looking to buy their bonds, this credit tap is slowing, which could force these companies to severely cut costs to compensate, or even shut down entirely. This is especially the case for companies exposed to heavy coronavirus zones, such as Italy or China; as quarantines mean less economic activity, these firms are suddenly faced with expenses they can no longer borrow their way out of.   

Click here to see more of the latest news from the NYSSCPA.