Credit On Verge Of Crisis: $176 Billion A-Rated Bonds Downgraded To BBB In Q4

Friday, December 14, 2018
By Paul Martin

by Tyler Durden
Fri, 12/14/2018

While the market’s frenzied attention has lately shifted to the cracks appearing in the leveraged loan market, which as we reported last night is seeing the “wheels come off” following record outflows, a collapse in loan prices, massive original issue discounts, pulled deals, banks retaining loans on their books unable to find buyers and a general sense that the market is about to freeze, one should not forget the original bogeyman that many believe will be the cause of the next credit crisis when the upcoming recession finally hits: a wholesale downgrade of investment grade (or BBB) rated companies into the junk space as rating agencies finally wake up to the reality of what the combustible mix of record debt, declining cash flows and a contracting economy mean for US corporations.

And it is here that things are once again moving from bad to worse.

Recall that just two weeks ago we reported that no less than $90 billion in A-rated bonds had been downgraded to the lowest investment grade rating, BBB, below which companies become “fallen angels” as they move from investment grade to high yield, resulting in forced liquidations as countless vanilla funds are simply not permitted by their mandate to retain junk on their books.

Fast forward to today when Goldman reports that just two weeks after our original report, the number of A to BBB downgrades has doubled to a whopping $176 billion in the fourth quarter, just shy of the all time high hit in Q4 2015, and with several more weeks still left this quarter, it is likely that a new downgrade record will soon be hit.

As Goldman’s Lotfi Karoui writes overnight, there are good and bad news in the recent data.

The good news is that in the credit strategist’s opinion, the downgrade risk is higher among A-rated issuers than it is among their BBB-rated peers.

The bad news is that Goldman may have been “too” correct, as this view has continued to play out through 4Q2018, and “quarter to date, over $176 billion of debt has migrated into BBB territory from the A bucket; the highest amount since 4Q2015, which was a period characterized by a heavy wave of commodity-related “fallen angels”.

The Rest…HERE

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