Recession Panic Means $270 Billion of Bonds Now Trade Like Junk

(Bloomberg) -- When it comes to the health of the corporate debt market, traders and rating agencies are once again miles apart.

Raters are eyeing possible downgrades to junk for about $100 billion of bonds from the weakest investment-grade rated firms -- well short of the $270 billion of high-grade securities that already trade at speculative-grade levels, according to Bloomberg Intelligence research.

In the run-up to the financial crisis, companies faced ballooning refinancing costs long before ratings firms moved to downgrade. Now doubts are swirling again about how debt-laden companies will survive a recession -- this one spurred by drastic measures to contain a global pandemic.

“Right now there isn’t a good sense about magnitude and duration to the virus impact,” said BI analyst Noel Hebert. “If you get some ugly quarters with ugly outlooks, rating agencies will come off the sidelines.”

With tourism on the frontline of the spreading economic malaise, Royal Caribbean Cruises Ltd. received notice from S&P Global Ratings this week it may be stripped of its investment-grade label. Two speculative ratings would banish the bonds from the Bloomberg Barclays investment-grade index and make them ineligible for many funds.

Delta Air Lines Inc., Macy’s Inc. and Marathon Oil Corp. are among investment-grade rated companies with bonds whose trading levels are aligned with junk debt, according to Bloomberg data.

To identify obligations the market has already junked, Hebert tracked securities on the lowest rung of the investment-grade credit scale with a spread in excess of the average 360 basis point in a Bloomberg Barclays index of bonds rated BB+.

The figure represents about 9% of the BBB rated category, the largest in the high-grade market. Less than 3% of the investment-grade market has been stripped of its ratings annually since 2000, according to research by JPMorgan Chase & Co. last year.

--With assistance from Tasos Vossos.

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Sid Verma, Yakob Peterseil

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