A wave of credit rating downgrades in the corporate sector risks deepening a funding crisis for company bosses and spreading it to other markets
With certain sectors such as airlines, travel and energy badly hit, S&P has said it now sees default rates in the United States surging past 10% having only last month expected 3.5%, and Fitch is firing warnings too.
In its last annual report, BIS said a drop in ratings could lead investors to “shed large amounts of bonds quickly”, leading to “fire sales”.A panicked sell-off is not a given, however. Over the past few weeks, central banks and governments have laid out trillions of dollars in various programs to support financial markets and companies.
Further, ratings agencies say their assessments take a longer-term view. “We don’t believe we serve markets well by reacting to every zig and zag in the market,” said one senior ratings agency source, who asked to remain anonymous due to the sensitivity of the situation.How far such support goes remains to be seen.
Ed Altman, a professor at New York University’s Stern School of Business who created the Altman Z-Score to sniff out companies in financial distress, examined 350 BBB-rated U.S. companies as of the end of 2019. His research indicated that more than 30% of those companies, with $600 billion or more of bonds, should have been rated ‘junk’.
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