Recession Reality Check Threatens More Downgrades for Junk Firms
2020-07-01 11:04:13.130 GMT
By Marianna Aragao and Olivia Konotey-Ahulu
(Bloomberg) — The deluge of ratings downgrades for
European companies dwindled in recent months, but the relative
lull may prove fleeting, as recession undermines both their cash
flow and chances of cutting debt.
Credits sensitive to growth can expect sharp declines in
consumption and business investment, according to Fitch Ratings,
which anticipates a contraction of 8% of GDP for the eurozone
this year. Upcoming earnings should clarify the future of the
lowest-rated issuers in a post-Covid-19 world, and potentially
spur a new wave of downgrades.
“A lot of companies that were not directly affected by
restrictions will face a more challenging cash-generation
environment from weaker pricing power and lower volumes,” said
Ed Eyerman, Fitch’s managing director for European leveraged
finance.
Downgrades in Europe’s high-yield market in the aftermath
of the pandemic reached levels worse than those seen in 2009,
but have subsidized since May. They amounted to 1.5 billion
euros of debt in the week ending June 26, the lowest since the
Covid crisis began, according to Bank of America Corp. credit
analysts.
Downgrade Volumes for European Junk Bonds Exceed 2009 Peak:
BofA
“We’re coming to the tail end of that downgrade cycle,
that’s pretty clear,” said Barnaby Martin, a strategist at the
bank, with rating agencies becoming “cognizant” of liquidity
raised by firms in recent months.
But a second wave of rating action is likely if economic
recovery from the pandemic proves short-lived or peters out
entirely, Martin said. This could only become clear in the
fourth quarter though, as “the real world” reveals itself.
More Action
Fresh cuts in recent weeks have spooked some investors.
Notes from vending machine operator Selecta Group BV
dropped 3 cents after S&P slashed it to CCC- this week, while
those for TV production company Banijay Group SAS fell 4 points
in 2 days following a cut to B- also from the same rating agency
in June.
The market is “discovering the fact that rating agencies
will continue to do their job in cutting their ratings in light
of the Covid-19 crisis impact,” Spread Research analysts wrote
in a June 12 note.
As the reviews took place, the number of high-yield bonds
with at least one triple C rating — the lowest tier before
default — jumped from 53 in February to 79 in June, according
to data compiled by Bloomberg.
They now represent 14% of a Bloomberg Barclays index for
junk corporate bonds in Europe, versus around 9% before the
crisis.
This growth was counterbalanced by an increase in the
number of double-B rated firms, reflecting a rise in the number
of investment grade companies relegated to junk status, known as
fallen angels. Yet for bond investors with higher risk appetite,
that means more investment options.
“Most high yield investors can differentiate from the bad
and good and are happy to look through ratings,” Azhar Hussain,
head of global credit at Royal London Asset Management.

–With assistance from Irene García Pérez.