Thursday, July 12, 2018

Lowest Rated Investment Grade Debt

It's always interesting to visit BBB-land and ponder their likely direction should business conditions become less-than-optimal.
From FT Alphaville:

The herds and the BBBs 
It can be difficult to discuss the erosion of social norms. The observer risks sounding hysterical or reactionary if they take the view that looser standards are categorically harmful and should be avoided. (Maybe the standards were unnecessarily strict!)

At the same time, pretending such an erosion is not happening gives the impression of delusion, and assuming that it does not matter veers into nihilism. Finance has not been immune from the fraying of mores that has come to characterise the Pax Americana. In fact, it may be the frontier of such behaviour.

We face a similar challenge when discussing the impact of central banks' unusual response to the financial crisis. Their bond-buying programmes pushed down yields on safe government securities and herded investors into riskier debt and equities, suppressing corporate borrowing costs and encouraging companies to load their balance sheets with debt.

But since the financial crisis, this herding dynamic has challenged the previously axiomatic view that investment-grade ratings -- and the historical standards for leverage followed by IG borrowers -- are sacrosanct.

At the end of 2017, the weighted net leverage of investment-grade borrowers had climbed to 2.2 times ebitda from 1.6x ebitda a decade before, according to CreditSights. And the steepest increase in leverage has come from higher-rated debt, they found:
That brings us to the BBBs, the tier of corporate bond ratings one level above junk (BBB+, BBB and BBB-). The sector has ballooned in the past several years as companies took advantage of historically low interest rates to borrow in size, weakening their balance sheets and ratings in the process.
Not only is it bigger -- it has grown to 49 per cent of ICE BofAML's corporate index from 38 per cent at the end of 2009 -- the most indebted companies in the index have piled on plenty of leverage as well.... 

Triple A is also interesting as there is only one direction the rating can go should their fortunes change.