The big news in bonds before the pandemic began shutting down the economy was that American companies had loaded up on “BBB” bonds—some $2.67 trillion in long-term non-financial debt was hanging in the “BBB” category through the first quarter of this year, according to Standard & Poor’s.

With the economy in a tailspin, however, those angels have finally begun to fall.

Iconic carmaker Ford Motor Company is now a junk bond issuer. Occidental Petroleum, too, as of March. In February, food giant Kraft Heinz was also slashed to speculative grade. Macy’s, oil company Apache and Delta Air Lines … they’re all now in junk land.

And there’s a watch list for those next on the chopping block. That list includes candidates such as aerospace giant Boeing (downgraded to “Baa2” by Moody’s in April) and carmaker General Motors (downgraded to “BBB-” by Fitch in early May).

In all, says S&P, $235 billion in debt was slashed to speculative grade in the first quarter of 2020—and oil, infrastructure, and the retail-restaurant sectors felt the most pain. As the rating agency said in an early April report, “Downgrades, negative outlook revisions, and CreditWatch placements have increased in the wake of Covid-19, especially in those sectors that have experienced the immediate and acute economic and business impact of the pandemic, such as airlines, transportation, retail, lodging and leisure, gaming, and autos.”

American companies had loaded up on debt for the past seven years because interest rates were so low and they could take the opportunity to recapitalize, buy back stock, make capex improvements, devour other companies, etc. Most of the time, they repurchased stock. Household names in the “BBB” category found it to be an easy way to raise money.

But all that could now come back to haunt them, especially those low margin companies that burn through cash—particularly retail, cars and airlines. “Ford and GM are burning significant amounts of cash right now,” says Jeff Friedman, co-head of credit opportunities at GMO. As is Boeing, he adds.

The Fed Steps In
But the Federal Reserve has become a new player in this soap opera—it began buying bond ETFs in early May, including junk bond debt, assuaging investors' liquidity fears and putting a foundation under the market. The Fed reported $1.8 billion in corporate bond ETFs on its books already by May 21.

“The Fed is actively intervening in the market to make sure there is liquidity,” says Brad McMillan, the CIO at Commonwealth. “Companies are very deliberately at this point trying to harvest as much of the low-interest rate money as they can. If they can keep the same amount of debt but simply cut their coupon rates, that’s going to be a significant benefit going forward. That’s an improvement to the cash flow situation and it drops directly to the bottom line.”

The current space can be attractive to investors especially of high yield, Friedman says.

“Auto sales came to a screeching halt in March,” says Friedman, “but data out of China has already suggested that auto sales actually rebounded pretty quickly in China when they were three months into their coronavirus. And we think auto sales in the U.S. are going to be OK through this, especially as consumers potentially don’t want to fly as much and take drive-to vacations.”

Ford’s woes are a good indication of the troubles low-margin, cash burning, coronavirus-plagued businesses have seen. The company said in April it had $34 billion in revenue in the first quarter yet lost $600 million in adjusted EBIT. That came amid its announcement that it was issuing $8 billion in newly high-yield, unsecured debt in three tranches, $3.5 billion due in 2023 with a coupon of 8.5%; $3.5 billion due in 2025 with a 9% coupon; and $1 billion of debt due in 2030 with a 9.625% coupon.

S&P Global Intelligence said: “Due to the timing of the S&P Global Ratings downgrade, Ford's debt is eligible for the liquidity backstops that the Federal Reserve expanded on April 9, to support issuers and bonds affected by fallen-angel downgrades after March 22.”

The Fed moves caused spread compression in both the investment-grade and high-yield spaces. “The average high-yield spread is 66% of the way back to its 15-year median of 4.66%, while the investment-grade spread is 79% of the way back to its median of 1.36%,” said LPL in a commentary. “While valuations still lean attractive, spread compression may not be a major driver of returns looking forward, for investment-grade corporates.”

Usually, wider yield spreads lure bond investors, Friedman says. Though the market has snapped back in a lot of ways and those spreads have tightened after the Fed’s moves, the spreads are still fairly attractive. “As we sit here today, high-yield spreads are around 770 basis points, which has tightened in over 300 basis points from the March 23 wide levels of 1140 basis points. The long-term average for high yield spreads is about 550.” The wider average spreads augur both downside protection and equity-like returns, he says.