The Debt Doghouse Is Filling-Up Fast----Junk Downgrades Soaring

By Joel Lewin at Financial Times

The debt doghouse is filling up fast. More companies were downgraded to junk status by Moody’s in the first three months of the year than in the whole of 2015.

In total, 51 companies were pushed into junk territory, up from eight in the fourth quarter and 45 in 2015.

The sharp increase in number of so-called “fallen angels” — as those companies stripped of their investment grade status are known — comes as focus intensifies on whether the current credit cycle, which began after the 2008-2009 financial crisis, is turning.

Pressure on borrowers’ balance sheets has been particularly acute among those exposed to the falling price of commodities.

Moody’s also blamed the travails of the commodities market on the significant swelling in the number of “potential angels”, or those companies at risk of being cut to junk.

The increase in the number pushed the amount of debt in “potential angel” camp to $265bn by the end of March.

That is up from just $234bn at the end of the year and $105bn at the end of the first quarter in 2015.

Of the 51 companies that lost their investment grade at Moody’s in the first quarter, those from the oil and mining industries accounted for 22 of them.

With 16, the US oil and gas industry accounted for the vast majority of the casualties in the commodities industry.

A renaissance in US oil production, driven by technological advances that allow crude to be extracted by the shale rock found in several states including Louisiana, Texas and North Dakota, encouraged oil and gas explorers to borrow aggressively.

While defaults among commodities companies have helped push the overall rate up for the most speculative of borrowers, the rate outside the energy and mining sectors has remained low.

However, the turbulence in the commodities market was not the only stain on borrowers’ ratings during the quarter.

 

Moody’s decision to cut Brazil’s sovereign rating to junk in February also pushed 28 of the countries into junk territory.

Latin America’s largest economy is in the midst of a political crisis as president Dilma Rousseff fends of an impeachment threat, while the country is in the grips of its worst recession since the 1930s.

“The pressure on commodity-linked industries and sovereign ratings were the key drivers of increased activity,” Moody’s added in its report.

The spate of Brazilian companies pushed into junk last quarter has left the US as the most likely source of companies exposed to future downgrades into junk.

North America is now home to 34 per cent of the so-called “fallen angels”, followed by Europe with 31 per cent, Asia with 25 per cent and 10 per cent from Latin America.

“Negative rating actions during the quarter flushed out a large portion of the potential fallen angels from the prior period,” Moody’s said.

“Yet, the crossover zone membership remains high and we expect more fallen angels throughout 2016. The list of potential fallen angels is more diverse than last quarter, when Brazilian and commodities-linked issuers dominated the list.”

While the first quarter was marked by a blitz of downgrades, Moody’s upgraded just two companies in the first quarter of the year.

The number of companies put on watch for a potential upgrade to investment grade status was also only two.

 

Source: Junk Downgrades Already Outpace 2015 - Financial Times

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