Falling Credit Quality of US Firms (WSJ)

Mind The Bond Market Fractures — Credit Downgrades Highest Since 2009

by Wall Street Journal • October 12, 2015

 

By MIKE CHERNEY at The Wall Street Journal

Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat.

Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009.

The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U.S. Treasury securities.

The softening U.S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy.

But rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U.S. economic health.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data. PHOTO: MIRA OBERMAN/AGENCE FRANCE-PRESSE/GETTY IMAGES

In August and September, Moody’s Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession.

Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P.

About a third of the downgrades targeted oil and gas companies or firms in other commodity-linked industries, following a plunge in oil prices in the second half of 2014, said Diane Vazza, head of global fixed-income research at S&P.

Corporate finances are on the decline in other sectors, too. Wireless provider Sprint Corp., hotel and casino operator Wynn Resorts Ltd., insurance company Genworth Financial Inc. and pet-supplies company PetSmart Inc. were among the companies downgraded by S&P this year, highlighting the breadth of industries affected.

Those companies are in the junk category, meaning they are rated double-B-plus or below, but even higher-rated companies like McDonald’s Corp. and Mattel Inc. have been downgraded this year.

Bond prices have suffered. A Sprint bond maturing in 2025 fell from about 96 cents on the dollar to about 77 cents in September after Moody’s downgraded the company. A 2024 McDonald’s bond dropped from about 104 cents in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

“We’re seeing more widespread weakness across more industry sectors in the U.S.,” Ms. Vazza said. “It’s become broader than just the commodity story.”

U.S. companies have increased borrowing to levels exceeding those just before the financial crisis, as firms pursue big acquisitions and seek to boost stock prices by buying back shares. According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.

“The metrics that you measure health and credit by have peaked a while ago,” said Sivan Mahadevan, head of credit strategy at Morgan Stanley. “They are beginning to deteriorate.”

Many investors and analysts say the concerns are overdone. They note that the U.S. economy is still expanding and that many large firms continue to raise money at historically low rates. They say the U.S. unemployment rate, which held at 5.1% in September, is the lowest since 2008, despite unease over slowing economic growth overseas.

While “there are some areas of weakness,” Ms. Lurie said, “there are many other points to show positive economic growth.”

Corporate finance chiefs have been willing to absorb downgrades because a stellar rating has become less important, with little price difference between some bonds with ratings a few notches apart. And until recently, companies had little trouble selling debt regardless of their rating.

But lately some companies, including the U.S. arm of Spanish bank Banco Santander SA, have had to pull bond deals and others, like chemical producer Olin Corp., had to pay higher interest rates than initially expected. Bankers lowered the price and increased the interest rate recently on a loan being sold to investors for insurance brokerage Integro Ltd., according to S&P Capital IQ LCD.

Another cause for concern: the earnings outlook is starting to dim, as slower growth in China and low commodity prices begin to hit firms’ revenue. In the third quarter, earnings for S&P 500 companies were expected to decline 5.1% over the same quarter last year, according to data as of Sept. 30 from FactSet. That follows an earnings decline of 0.7% in the second quarter compared with the year ago period.

Big U.S. companies with global footprints, like Caterpillar Inc., Monsanto Co. and Hewlett-Packard Co., have all announced layoffs in recent weeks. Analysts and investors say a strong U.S. dollar compared with currencies in other countries will hurt some U.S. companies’ revenues in the coming months.

Worries about companies’ financial health have pushed the difference in yield—called the spread—between corporate bonds and ultrasafe U.S. Treasurys to its highest level in more than three years, according to Barclays data. A bigger spread means investors want more interest relative to Treasurys to compensate them for the added risk of buying corporate bonds.

The spread for investment-grade firms recently hit 1.71 percentage points, up from 0.97 percentage point in July 2014, a move that analysts warn has foreshadowed broader economic troubles in the past.

“We are less dependent on global growth than many other developed countries, but we are not immune to the weakened economic fundamentals outside the United States,” said Gary Cloud, a portfolio manager who helps oversee the $463 million Hennessy Equity and Income Fund.

Source: Cracks Emerge in Bond Market – WSJ

Latest Downgrades to Junk - Fallen Angels (Bloomberg, WSJ)

‘Fallen Angels’ Jump to Third-Highest Monthly Total, S&P Says


By Megan Johnston

July 13 (Bloomberg) -- Fifteen companies lost their investment-grade ratings in June, the third-highest monthly tally since 1987, according to Standard & Poor’s. With rankings for two additional issuers cut to junk status, the number of “fallen angels” climbed to 60 this year with a combined debt of $209.2 billion, S&P analysts led by Diane Vazza in New York said in a report today.

The tally of borrowers downgraded last month to junk, or below BBB-, ranks behind the 19 issuers cut to junk during the Asian financial crisis in December 1997 and the 17 whose credit ratings were reduced in March, S&P said.

The largest fallen angel this year is CIT Group Inc., the New York-based commercial lender that has been unable to persuade the government to back its bond sales, with $38.2 billion in rated debt, S&P said.

Moody’s Investors Service slashed CIT’s credit rating four levels to B3, from Ba2, and said the ranking may be cut further because of the company’s “inadequate progress” toward improving its liquidity, according to a statement today.

An additional 75 issuers with combined debt of $255.2 billion are at risk of losing their investment-grade ratings, S&P said.

“Not surprisingly, many of the sectors represented on the potential fallen angel list -- such as consumer products, forest products and building materials -- show a high preponderance of negative bias,” the S&P analysts said in the report.

To contact the reporter on this story: Megan Johnston in New York at mjohnston17@bloomberg.net

Last Updated: July 13, 2009 14:12 EDT



Standard & Poor's said the number of issuers downgraded to speculative grade last month was the third highest monthly tally since it started keeping track of the figure in 1987.

Fifteen entities were cut to junk territory in June, and with two more added so far this month, the year-to-date tally has jumped to 60 issuers, with rated debt of $209.17 billion affected.

Finance companies lead this year's so-called fallen angels with 10 so far, followed by banks at nine and utilities with six.

S&P said 75 issuers currently exhibit fallen-angel potential - entities rated BBB- either on watch for downgrade or with a negative ratings outlook. Those firms have $255.22 billion of rated debt. Banks still lead the list of companies vulnerable to being cut to junk, with 15 companies, followed by consumer products and insurance with eight apiece and utilities at six.

Struggling U.S. commercial lender CIT Group Inc. (CIT), which could soon file for bankruptcy protection, tops the list as the largest fallen angel so far this year based on debt volume, with $38.19 billion in rated debt.

Besides CIT, other new fallen angels include insurance holding company Ambac Financial Group Inc. (ABK), French auto maker Renault SA (RNO.FR) and U.S.-based bank holding company Whitney Holding Corp. (WTNY).

The Republic of Hungary is the largest potential fallen angel this month, S&P said, with $53.99 billion in rated debt.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

(from the street.com ) Moody Comments on probability of GM Bankruptcy

Business News Update
GM Bankruptcy Chance 70%, Says Moody's
Ted Reed
04/07/09 - 11:58 AM EDT
Credit analysts fully expect a bankruptcy filing by General Motors

The likelihood is 70%, Moody's analyst Bruce Clarke said Tuesday, reiterating the odds he set in December. Meanwhile, KDP analyst Kip Penniman reiterated recently that: "We believe a pre-packaged Ch. 11 financial reorganization is GM's only path to successfully reducing its pre-existing liabilities and negotiating competitive labor contracts.

"We expect the (Obama) administration would prefer that Chrysler and GM restructure outside of bankruptcy," Clarke wrote. "(But) given the lack of progress achieved and the additional progress that will be required in the revised plans, this threat will need to be seen as credible in order to compel adequate movement on the part of stakeholders."

While it is possible the administration is bluffing, wrote Clarke, "any attempt to call that bluff could be a risky strategy."

The administration has identified three key restructuring targets for GM: reducing unsecured debt by two thirds, reducing wages and benefits in the United Auto Workers contract, and making half of its future contribution to the union-administered retiree health care trust in stock rather than cash.

Not only has GM so far failed to achieve these targets, but its problems are compounded because it is unlikely to meet assumptions in its plan regarding vehicle sales, cost savings, market share and pricing, Penniman wrote.

Among the problems pushing GM to file, Penniman wrote that while the UAW may agree to contract cuts, "it will prove a tough sell to the rank and file UAW members who will ultimately vote on the plan." Also, retirees are unlikely to back a plan to fund a share of their health care obligations with stock, and if the UAW agrees, "we would expect to see a very emotionally charged series of lawsuits filed against the UAW and GM.

Also, Penniman said, "there would remain a significant number of bondholders who would choose not to participate in any debt exchange." Meanwhile, secured lenders would likely be asked to voluntarily sacrifice collateral in order to provide super-priority status for government loans, but "any effort to cram down the secured lenders outside of bankruptcy court would set a dangerous precedent.

"We believe the chances that GM could accomplish all of this 'voluntarily' are essentially zero," he wrote.

Bankruptcy remains a possibility for the other Detroit automakers, Clarke wrote. He said the risk is "moderately below" 70% for Ford(F Quote - Cramer on F - Stock Picks), while Chrysler's risk is higher than 70%.
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Ford: Good Response from Debt Buyback, Debt Downgraded (Bloomberg)

Ford Reduces Debt 38% With Buybacks of Bonds, Loans (Update3)


By Keith Naughton and Caroline Salas

April 6 (Bloomberg) -- Ford Motor Co., slashing costs to stay off government aid, said it trimmed $9.9 billion of borrowings as the company completed its largest debt restructuring.

The transactions, which reduce automotive debt by 8 percent, will “substantially strengthen Ford’s balance sheet,” the second-biggest U.S. automaker said today in a statement. Ford had sought to erase as much as $11.3 billion in notes and loans in a three-pronged effort. The company’s shares rose to their highest close in six months.

“It gives them more time, and the timing was really good because it would be a lot more difficult if they borrowed money from the government,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which holds Ford bonds. “It’s always a great move when you can buy back your debt at 30 cents on the dollar.”

Ford on March 4 offered investors the chance to accept discounted payouts for the notes and loans, trimming debt costs as the automaker tries to stem losses that totaled $30 billion in the past three years. The Dearborn, Michigan-based company has avoided U.S. assistance, while General Motors Corp. and Chrysler LLC survive on $17.4 billion in federal loans.

The company, which lost a record $14.7 billion last year, said it will save more than $500 million in annual interest costs. The automaker and its Ford Motor Credit Co. finance unit will use $2.4 billion in cash and 468 million Ford Motor shares to repurchase the debt. The shares are valued at $1.76 billion based on today’s closing price.

Shares Rise

Ford rose 52 cents, or 16 percent, to $3.77 at 4:15 p.m. in New York Stock Exchange composite trading, the highest close since Oct. 3. The shares have gained 64 percent this year.

The automaker has enough liquidity left to remain self- sufficient and not seek government aid, Treasurer Neil Schloss said in an interview.

Should the U.S. auto market, which is at a 27-year-low, not recover, Ford is better shape to seek government aid, JPMorgan auto analyst Himanshu Patel in New York said in a research note.

“The exchange could be aimed in part at mollifying the concerns of various stakeholders and a possible precursor to eventual government aid,” said Patel, who has a “neutral” rating on Ford shares. “Ford has now accomplished a fair amount of what was asked of GM and Chrysler.”

Schloss said the debt restructuring “met all our expectations.” Shelly Lombard, an analyst for bond researcher Gimme Credit in New York, said he had expected more than $11 billion in debt to be retired.

Rating Lowered
Standard & Poor’s cut Ford’s corporate credit rating today to SD, or selective default, and said it would assign a new rating by mid-April based on the automaker’s balance sheet and business prospects. S&P said the new rating will likely not be higher than about CCC, or 8 grades below investment status. The previous rating was CC, or 10 steps into junk.
Fitch Ratings said the debt transaction are a “positive step in managing the company’s liability structure” and left Ford’s ratings unchanged. Fitch and Lombard at Gimme Credit said they were concerned that Ford access to funds is declining.

“With poor operating results now expected through 2009, Ford’s liquidity is becoming strained,” Lombard wrote today in a note. “Although Ford’s future still depends on a recovery in auto sales, the debt restructuring and union contract changes have decreased the chances of a Ford bankruptcy.”

Notes Rise

The automaker’s $579 million of 4.25 percent convertible notes due in 2036 gained 6 cents to 46.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities yield about 10 percent.

Ford Credit’s $3.5 billion of 7.25 percent notes due in 2011 were unchanged at 72 cents on the dollar, according to Trace. They yield 22.2 percent, or 21.3 percentage points more than similar-maturity Treasuries.

The automaker’s bonds gained 36.6 percent in March after Ford asked investors to swap their debt, according to index data compiled by Merrill Lynch & Co. That compares with a 1.9 percent return for GM securities, Merrill data show.
The automaker, which consumed $21.2 billion in cash last year, is tapping some of its available funds to finance the buybacks. Ford is using $344 million of its $13.4 billion in automotive cash, Schloss said. Ford Credit is spending $2.1 billion of its $18 billion in funds, he said.

‘Decisive Actions’

“Ford continues to lead the industry in taking the decisive actions necessary to weather the current downturn,” Chief Executive Officer Alan Mulally said in a statement.

The final phase of Ford’s offer, which ended April 3, included a cash-and-stock proposal valued at about 28 cents on the dollar to induce holders of $4.9 billion in convertible bonds to trade for the company’s common shares. Bondholders claimed $4.3 billion of that proposal, an 88 percent take rate that the company considered oversubscribed, Schloss said.

Ford also offered to spend $1.3 billion to buy back unsecured non-convertible debt. Holders claimed $1.1 billion of that amount, retiring $3.4 billion in debt, the company said.

Ford on March 23 also said an offer to repurchase its term loans was oversubscribed, prompting the company’s finance arm to double to $1 billion the cash it planned spend on the so-called Dutch auction. Ford said today that it will buy $2.2 billion of the principal amount of the debt, at 47 percent of face value.

The automaker had $25.8 billion of debt at the end of 2008 after borrowing $23.4 billion in late 2006, giving it more cash than GM or Chrysler. As collateral for that financing, Ford put up all major assets, including its headquarters and blue oval logo.

U.S. automakers are struggling after industry sales of cars and light trucks fell to a 16-year low in 2008 and declined 38 percent in this year’s first three months. Ford’s U.S. sales fell 41 percent in March.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: April 6, 2009 16:34 EDT