Watch out for those falling angels!
While the big story in credit markets has been booming sales of new debt, ultra-low credit spreads and resilient corporate balance sheets as recognized by the billions of dollars worth of bonds being upgraded by rating agencies, the trend may be fading.
The proportion of BBB-rated bonds — those at the lowest tier of investment-grade — that are now on watch for a downgrade has recently surpassed the proportion of debt on watch for upgrades for the first time since early 2020, during the depths of the pandemic.
While “credit fundamentals are generally strong and ratings momentum is positive, the risk of downgrades to high-yield has increased recently,” say Bank of America analysts led by Yuri Seliger. “Moreover, some of the capital structures potentially at risk of a downgrade are large.”
Analysts have for years been warning of a ‘Triple B bubble, or the idea that a swelling amount of investment-grade debt is at risk of being downgraded into junk, or transforming into proverbial “fallen angels” in market parlance.
So far, that’s failed to materialize and 2023 instead market one of the slowest years for fallen angels on record, with just $19.1 billion of US debt dropping from investment-grade to high-yield status, according to CreditSights Inc. data.
Billions of dollars worth of debt sold by BBB-rated companies has instead been upgraded in recent months as companies continued to shore up their balance sheets. And so great has been the surge in upgrades that some analysts have argued that it’s helping to keep spreads, or risk premiums, on corporate debt low despite the highest benchmark interest rates in decades.
Complicating matters now, however, is the number of large issuers of debt potentially facing downgrades. These include Charter Communications Inc. with $45.1 billion in bonds outstanding and Paramount Global with $13 billion.
Even Boeing Inc., once a stalwart of US industrial policy, is at risk after both Moody’s and Standard & Poor’s recently moved the company to a negative outlook. The aerospace giant has some $45.8 billion of debt outstanding, though it was recently able to sell $10 billion worth of new bonds, rated BBB-, with relative ease.
“In a potential event of a downgrade to high-yield, Boeing and Charter would rank as [the] fifth and seventh largest fallen angels on record as a share of the BB index,” the Bank of America analysts said.
Related link:
Is This The Beginning of the Bursting of the BBB Bubble? — Odd Lots