Even with swelling ranks of BBB rated companies, America Inc.’s creditworthiness is better than the market pricing indicates, according to JPMorgan. The firm’s strategists led by Eric Beinstein anticipate less than 1 percent of the high-grade market will turn to junk this year, and 1.1 percent in 2020. That’s still well below the historical average of 2.7 percent per year, according to a Feb. 21 note.
“For many of the largest 50 BBB issuers we believe the risk of downgrade to BB is overpriced,” the strategists wrote. “The reasons for the generally optimistic assessment include strong financial flexibility, a commitment to deleveraging and preserving IG ratings by company managements and solid operating performance.”
Cycle Caution
It’s easy to construct the bearish case, of course. One counterpoint comes from Citigroup Inc.’s Matt King: While the Federal Reserve’s enduring dovish stance has placed a ceiling on interest costs, the debt market is hostage to late-cycle risk.
“Psychology plays a critical role in driving the market at this point,” the global head of credit products strategy said at a London briefing earlier this month. “If anyone gets scared for any reason -- whether that’s Italy or the Fed withdrawing or outflow from mutual funds -- then quite rapidly those refinancings can become a problem.”
The threat of fallen angels, meanwhile, may continue to darken the horizon. The number of investors demanding companies reduce leverage climbed to a decade-high this month, according to a Bank of America Merrill Lynch survey, while two-thirds expect slower economic growth in the next 12 months.
“Investors remain cautious about the potential implications of large fallen angel volumes, for both the credits downgraded to high-yield and legacy high yield issuers,” according to Barclays strategists.
This article provided by Bloomberg News.