US companies will soon lose their coveted top-quality credit ratings, sending their debt tumbling into the rating category known as “junk.”
A cut in rating below investment-grade — marked by the threshold between triple B and double B — indicates a stern warning from the likes of Moody’s and S&P Global for companies to improve their balance sheets.
The rating agency responses demonstrates how a public health crisis is prompting a reassessment of corporate credit risk, raising doubts about borrowers that had long been seen as stable. That is changing how markets view sectors from cruise lines to retailers, forcing companies as large as Boeing and United Airlines to review their borrowings, and posing the risk of financial institutions being saddled with problem loans.
The sharp spike in borrowing costs has raised concerns over the ability of some companies to continue to service their debts. Triple B-rated Delta Air Lines’ bond maturing in 2021 is trading with a yield of 7.9 per cent, for example. Carmakers Ford and General Motors also have debt trading above 7 per cent.
Morgan Stanley Investment Management, estimates that one in six US companies does not earn enough cash flow to cover interest payments on its debt. Such “zombie” borrowers could keep putting off the crunch as long as debt markets kept letting them refinance. But now a reckoning is coming.
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