Credit rating agencies are revaluing hundreds of billions of dollars in US corporate debt, in a partial reversal of downgrades at the start of the pandemic that reflects the sharp rebound in profitability in much of US businesses.
About $ 361 billion in investment grade bonds have revalued in the past two months, including a record $ 184 billion in June, according to data from Bank of America.
The steady pace shows that credit rating agencies such as S&P Global, Moody’s and Fitch believe that the economic recovery boosted by the vaccine rollout has made corporate debt more manageable. It also reflects the abundant liquidity and low borrowing costs available to many companies, in part thanks to the Federal Reserve’s monetary stimulus.
“I don’t think you could have anticipated the vaccine, the economic growth and the high availability of very low-rated debt,” said Christina Padgett, senior vice president of Moody’s Corporate Finance Group.
Rating agencies, which had been reprimanded after the 2008 financial crisis for giving impeccable ratings to bonds that ultimately defaulted, acted quickly during the pandemic to lower their ratings on entire swathes of debt.
Ratings of nearly $ 1 billion of quality U.S. corporate debt were downgraded in March and April 2020, according to BofA data, on approximately $ 7.6 billion outstanding.
The US economy, which shrank 3.5% last year, is expected to grow about 6.6% in 2021, according to a Bloomberg survey of economists. S&P 500 company profits are expected to rise more than 60% in the second quarter compared to the same period last year, when economic activity stagnated, according to Refinitiv data compiling analysts’ forecasts.
As the outlook improves for investment grade bonds, so do those of riskier rated companies. Citigroup analysts have predicted that $ 200 billion in corporate debt will move to investment grade by the end of 2022. Already this year, $ 18 billion in junk debt has been raised to investment grade, according to the reports. bank data.
“It’s like something that I haven’t seen in my time [in the industry]”said Michael Anderson, credit strategist at Citigroup.” After the financial crisis, we did not get large companies back to the investment grade so quickly.
In recent months, companies rated as garbage have benefited from historically low borrowing rates, and even cash-strapped groups have had access to capital to survive declining profits.
The pace of the upgrades has drawn some criticism from analysts and investors who believe last year’s cuts were a disproportionate response to the pandemic.
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“The wave of downgrades was probably too severe,” said Yuri Seliger, credit strategist at Bank of America.
However, the major rating agencies have rejected this notion, pointing out that many countries suffered recessions in the last year. Emily Wadhwani, senior director of Fitch Ratings, said they were “proactive in their ratings” regarding the pandemic.
Moody’s strategists said nearly three-quarters of all downgrades at the start of the health crisis affected companies that were already struggling, noting that liquidity issues and vulnerable business models in the aftermath of the pandemic were also engines.
“None of us felt like March, April, May [last year] that the market was going to roar back, ”said Padgett,“ and all these weakly positioned companies were suddenly going to have all the debt they needed and then some. “