Page 18 - May-June 2018 GSE Report Flip Book

MONETARY POLICY MJAAYNU- AJRUYNE20210818
flogging $16 billion in bonds to fund the acquisition of a 77% stake in Flipcart, India’s biggest online retailer.
Future “fallen angels” are in the bulge bracket
In terms of dollar amounts, 56% of outstanding debt is rated “medium grade” (from A3 to Baa3), according to Moody’s. Baa3 is one hair above junk. A one-notch downgrade pushes a Baa3-rated company into junk territory and turns it into a “fallen angel.” In other words, the majority of companies sit one to four notches above that level.
Since 2009, the amount of this outstanding “medium-grade” debt has surged at an annual rate of 10% to a record of $4.1 trillion, up 120% since the beginning of 2011!
...One more word about Fallen Angels
About $640 billion in bonds are rated Baa3, one hair above junk, up from $295 billion in Q3 2007, just before the Financial Crisis. A one-notch downgrade of the issuing company would put them into junk territory. This would be the “fallen-angel downgrade.” Moody’s points out that on average over the span of a year — and these have been the good times—10% of Baa3-rated companies are downgraded into junk...
In view of how most companies wish to avoid a fallen-angel downgrade, and given the age of the current business cycle upturn, companies having a Baa3 bond rating might opt for relatively conservative financial management. Such companies might be expected to proceed cautiously with capital spending, employee compensation, acquisitions, stock buybacks, and dividends.
This is one of the ways in which debt and credit ratings can impact the stock market: via scuttled share buybacks and dividend, long before the viability of the company is seriously in doubt. (WolfStreet.com, Wolf Richter, 06/24/18)
© 2018 by Canfield Press, LLC. All rights reserved. www.canfieldpress.com
18