Borrowing costs for companies around the world are rising dramatically despite central bank interest rate cuts as rating agencies warn that the economic impact of the coronavirus will lead to a surge of corporate downgrades and defaults.
Fears about creditworthiness are prompting investors to put their money in the most easily traded securities — such as short-term government debt — raising borrowing costs for more highly rated corporate borrowers and choking off credit to riskier ones.
Rating agency Moody’s estimates the default rate for speculative-grade companies could hit nearly 10 per cent, with energy companies particularly hard hit. That is up from 2.3 per cent a year ago, and a historical average of 4 per cent.
“I think the pandemic coupled with the oil price crash and the asset price declines are creating a severe and extensive credit shock across regions, sectors and markets,” said Anne Van Praagh, a researcher at Moody’s.“The combined credit effects are unprecedented. This is not like anything we have seen before.”
Even highly rated companies that have been able to sell bonds during the outbreak have agreed to deals that will increase their total financing costs by hundreds of millions of dollars as revenues are threatened by an economic downturn.
The average yield for investment-grade corporate debt has risen from a year to date low of 2.26 per cent two weeks ago to almost 4.5 per cent on Thursday, according to an index run by Ice Data Services.
“It’s brutal. We have never seen such a big move in such a short amount of time,” said Monica Erickson, a portfolio manager at DoubleLine. “This is the quickest and most severe I have ever experienced, and I was around for 2008.”
For higher-risk “junk” rated companies, the sell-off has been even more severe, with the average yield on an index run by Ice doubling this month to over 10 per cent.
Companies have scrambled to raise as much cash as possible, with roughly $60bn of bonds sold by investment grade companies this week in the US, including more than $16bn on Friday.
The companies selling debt are all high-quality names, such as a $5bn bond sale for Coca-Cola and an $8bn deal for Intel, with those outside the very top tier still shut out from capital markets.
“Companies are focused on increasing liquidity, drawing down revolvers and accessing cash wherever possible. They are preparing for the worst because we are in an unprecedented environment,” said Ms Erickson.