A man wears a protective mask as he walks past the New York Stock Exchange on the corner of Wall and Broad streets during the coronavirus outbreak in New York City, New York, U.S., March 13, 2020.
Lucas Jackson | Reuters
Moody’s Investors Service has cut its outlook on corporate debt to negative, saying that an economy about to tip into recession because of the coronavirus will result in rising default rates.
The ratings agency warned that sectors “most sensitive to consumer demand and sentiment” will be especially hard-hit due to social distancing measures that slashed economic activity. They include global passenger airlines, the lodging and cruise industries, and autos.
In addition, plummeting energy prices will leave the oil and gas sector exposed, while banks also will face a challenging environment amid falling interest rates that eat into profitability and a deteriorating economy that will undermine credit quality.
“The coronavirus will cause an unprecedented shock to the global economy,” Edmond DeForest, senior credit officer at Moody’s, said in a report. “We have revised our growth forecasts downward for 2020 as the rising economic costs of the coronavirus shock and the policy responses to combat the downturn are becoming clearer. Business activity will likely fall sharply across advanced economies in the first half of 2020.”
The warnings comes even after the Federal Reserve took the unusual step of saying it would be buying corporate debt as a way to keep liquidity flowing in a market that froze up after the government announced social distancing measures.
While Moody’s said central bank intervention will help, some of the most heavily indebted sectors still will be vulnerable. The Fed’s purchases will be limited to investment-grade companies with strong credit quality.
“Government support will cushion the blow for some companies, but it is unlikely to prevent distress at businesses with less certain long-term viability,” DeForest wrote.
Nonfinancial corporate debt totaled $6.6 trillion at the end of 2019, a 78% increase since the Great Recession ended in mid-2009.
Low interest rates and easy financing terms helped fuel the boom. Investor protections known as covenants have been around all-time lows, meaning that some buyers could see big losses in event of defaults.
There also are companies on the borderline of investment grade and in danger of sliding to junk status that are posing risks for the corporate bond market. Goldman Sachs estimates that $765 billion worth of investment- and high-yield bonds have experienced ratings downgrades already in 2020.
DeForest also noted significant refinance risks — some $169 billion of debt will come due in 2020 and $300 billion in 2021 and rolling over that debt will be difficult “under these trying conditions,” DeForest said.