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.

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