Tidal wave of company defaults are coming our way.
March saw a wave of corporate credit rating downgrades. Unfortunately, along with ratings, multiple macroeconomic and market signals show that a wave of company defaults is coming our way, both in 2020 and 2021.
High yield spreads over Treasurys have widened significantly.
Moody’s Investors Services had 84 downgrades in March. This level of downgrades is on par with the 2008-2009 recession. According to Moody’s Associate Managing Director Christina Padgett “March downgrades extended well beyond oil & gas – reflecting the tremendous toll that the global coronavirus pandemic is exacting across a myriad of industries, including consumer products & protein, automotive, healthcare services, retail and travel.” Given very low oil prices, energy companies again are being affected.
Nonfinancial Corporates: North America Coronavirus Heat Map – Most sectors have moderate exposure
Moody’s Investors Services
Companies that have low ratings and/or are highly leveraged companies are the most vulnerable to the COVID-19 economic crisis. Moody’s analysts expect that these types of companies will push the default rate sharply higher by the end of the year from its current 4.5%. As I wrote on Tuesday, Moody’s analysts forecast that speculative grade, also known as high yield or junk, bonds could have default rates from 7.7 – 18.4%.
Moody’s Liquidity Stress Indicator has risen significantly to 6.8% in March from 4.5% in February. This is the highest level since September 2016.
Moody’s Liquidity Stress Indicator
Moody’s Investor Services
Companies with more ratings and liquidity problems will have a very difficult time taking out new loans from banks or issuing short-, not to mention long-term paper. In Moody’s rated universe, speculative grade maturities total $106 billion in 2020 and 2021; most of these have credit ratings of B2 or lower, with 38% rated B3 or lower. The lower the rating means that these companies’ likelihood of default is rising.
Speculative-grade maturities in 2020 and 2021 clustered at B3
Moody’s Investors Services
On Friday, Moody’s announced that its B3 Negative and Lower Corporate Ratings List (B3N list) had its highest tally ever of 311 companies. This is more than its peak of 291 companies hit during the 2009 -2009 crisis and the commodity-related downturn in April 2016. According to Moody’s analysts, “New companies added to the B3N list in March numbered 110, with the Services, Oil & Gas, Gaming, and Restaurant sectors being the largest entrants of the new population of the list, representing almost a 50% increase in the list’s tally month-over-month. As for the sector representation on the list, at 22%, Consumer/ Business services continues to dominate the rest of 25 sectors tracked, followed by approximately 11% for Oil & Gas, and Consumer Products at 8%.”
Sadly, the above data and analysis are only about rated companies. Company defaults will be far worse than what rating agency numbers tell us. It is important to note that there are thousands of companies around the country that are not rated that are already closing, or soon will, as more and more municipalities and states go into lockdown. These companies tend to be smaller than those that are rated and do not have the same type of access to bank loans. While more than half of states have ordered some type of shelter in place, not all states have done so. Unfortunately, the tidal wave of company defaults has yet to come.
Majority of states have some type of lockdown, but not 100%
Business Insider Source