By Sunny Oh
Ford could become the fifth largest fallen angel in history
Moody's decision to downgrade Ford's debt to "junk" rating" () sent alarm bells ringing among investors who have been jittery over the prospect of over-leveraged U.S. corporations losing their highly coveted investment-grade ratings.
But its their less creditworthy counterparts that may need to worry if Ford receives another downgrade by credit rating agencies S&P or Fitch and officially pushes the automaker out of investment-grade bond indexes. The sudden entry of a large issuer like Ford(F) into the high-yield bond market could weigh on prices for junk corporate credit.
The U.S. carmaker's more than $35 billion of debt would represent around 3% of the high-yield index. If one more credit ratings firm downgrades Ford, it would become the fifth biggest "fallen angel," or high-yield issuer once rated as investment-grade.
Analysts point to 2005 as a example of how fallen angels could overwhelm demand as investors struggle to absorb the bonds of the new entrant into the high-yield market.
Back then, troubles in the U.S. car industry saw both General Motors and Ford lose their investment-grade status. The junk bond market choked on the influx of supply as the total debt outstanding issued by both firms exceeded more than 12% of the overall market.
As a result, Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, estimated (downgrade of General Motors and its subsidiaries alone had caused high-yield credit spreads to widen by 50 points in 2005.
In other words, the extra premium investors demanded in return for owning a basket of junk bonds over comparable U.S. Treasurys had increased by another 50 basis points.
Investors have until now mostly focused on the $3 trillion worth of BBB-rated investment grade debt that is on the precipice of being downgraded to a junk rating, and may need to be sold by conservative investors like pension funds and insurance companies barred from holding debt from high-yield issuers.
But Hans Mikkelsen, head of U.S. investment grade bond strategy at Bank of America Merrill Lynch, said Ford's downgrade is more of an outlier in a largely improving story for the BBB-rated market.
"We think the Ford situation is idiosyncratic and has little read-through for the BBB-rated segment of the IG market where companies are less cyclical and using levers (cutting dividends, selling assets, etc.) to defend their IG ratings," said Mikkelsen.
See: Ford's debt rating gets downgraded to junk by Moody's ()
Opinion: The investing opportunity of a lifetime awaits us when the recession arrives ()
-Sunny Oh; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
September 10, 2019 15:16 ET (19:16 GMT)
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