General Electric Co.’s redemption in credit markets may cast a rosier light on some $140 billion of bonds seen as the next in line for junk ratings.
As the industrial giant at the epicenter of fears about corporate America’s leverage tackles its debt load, bondholders could end up the biggest winners if others follow suit.
Add in fresh Wall Street projections downplaying downgrades, and the vigorous new-year credit rally looks like it’s more than merely dumb money riding relentless monetary stimulus.
“GE was the worst, and best, thing that could have happened to the corporate bond market,” said Geof Marshall at CI Investments’ Signature Global Asset Management in Toronto. As treasurers turn their attention to leverage, “bondholders benefit from a healthy amount of fear of downgrades,” he said.
Shrugging off growth angst flashed in the Treasury market, U.S. junk bonds are on track for the best two-month performance in almost two decades, while the likes of Barclays Plc and JPMorgan Chase & Co. push back on the corporate stress-sparks-recession narrative.
History suggests about $100 billion bonds on average become fallen angels every year, yet market pricing suggests about $140 billion are in line for these downgrades (over an unspecified time period), according to JPMorgan’s analysis.
Meanwhile, GE announced Monday an asset sale to raise cash to pay down debt and stave off a threat to its investment-grade status. In other words, it’s turned from credit bad boy to deleveraging exemplar in a flash -- suggesting concern the $2.3-trillion BBB boom will turn to bust may be overwrought.
“Companies are re-focused on de-leveraging, no wonder high yield and investment grade are off to one of their best starts of the year,” said Marshall.
His rationale may be backed at the grass-roots level. Barclays forecasts that rising-star upgrades -- where bonds are lifted to investment-grade ratings -- will surpass $35 billion of fallen-angel downgrades in 2019.
“The largest BBB issuers have a low risk of downgrade to high yield given their significant cash flow levers and general defensive business industry positioning,” strategists led by Bradley Rogoff wrote in a recent note.