Corporate Bonds Face Red Light Amid COVID-19...Will They Become a 'Bomb' in the Global Crisis?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the novel coronavirus disease (COVID-19) crisis prolongs, concerns are growing that corporate bonds could trigger a global economic recession. Due to the halt in supply and demand caused by COVID-19, consumption has decreased and stock markets have plummeted, leading credit rating agencies to downgrade the credit ratings of related companies with worrying cash flows. Additionally, the plunge in oil prices has lowered the credit ratings of oil refining companies, adding weight to the possibility of a COVID-19-induced financial crisis.

◆ Is a COVID-19 Financial Crisis Coming? Concerns Over Debt of Insolvent Companies = The biggest concern is the high-risk corporate bonds that have significantly increased amid low interest rates. The Wall Street Journal (WSJ) reported on the 19th (local time) in an article titled "The Next Financial Crisis from COVID-19: Corporate Bonds in Record Risk" that the total size of leveraged loans estimated in 2018 reached $1.2 trillion (approximately 1,515 trillion KRW), about a 50% increase compared to early 2015.

The problem is that within leveraged loans, the proportion of companies with low credit ratings has increased. Citing data from credit rating agency Moody's, WSJ reported that as of July last year, companies with credit ratings of B3 or lower accounted for 38% of the leveraged loan market, up about 15 percentage points from 23% in June 2008. WSJ pointed out that "if leveraged loan prices fall or defaults occur, pension funds, insurance companies, mutual funds, and hedge funds will incur losses," and that banks and investors may not play their roles in this context, potentially leading to a credit crunch.

Janet Yellen, former Chair of the U.S. Federal Reserve (Fed), stated in an interview with WSJ, "What I always worry about is the existence of companies with excessive debt worsening any economic slowdown that may occur for any reason." Since stepping down from her position, Yellen has repeatedly warned that "corporate debt is too high" and that "if any event triggers a recession, the current high level of corporate leverage could prolong the recession."

◆ Increasing Number of Companies with 'Negative' Outlooks Due to COVID-19 = The risk level in the corporate bond market has been gradually rising since the COVID-19 outbreak. According to the outlooks released by credit rating agency S&P, a total of 123 non-financial companies had their credit ratings or outlooks adjusted from last month to today in relation to COVID-19. Among them, 49 companies had their credit ratings downgraded, while 74 companies had only their outlooks changed from 'positive' or 'stable' to 'negative.'

Eight out of ten companies whose ratings or outlooks were adjusted due to COVID-19 fall into speculative grade with credit ratings of BB+ or lower. Given the difficult circumstances caused by COVID-19, it is expected to be challenging for these companies to secure funding. Notably, the adjustments in credit ratings or outlooks were concentrated this month (103 companies) compared to last month (20 companies). This suggests that concerns about corporate credit have intensified following the COVID-19 pandemic declaration this month. The increase occurred as COVID-19 spread to the U.S. and Europe at the end of last month, prompting governments to implement lockdown measures and other countermeasures.

S&P cited reasons such as event cancellations, reduced travel, and decreased product demand due to COVID-19 for the companies whose credit ratings and outlooks were adjusted. By industry, among the 123 companies, media and entertainment-related companies were the most numerous at 32, followed by transportation sectors such as airlines with 22, retail and food service with 13, hotels and gaming with 11, and automobile companies with 10. By nationality, the U.S. dominated with 69 companies including Boeing and Delta Air Lines, followed by the U.K. with 9, and China and Brazil with 4 each. South Korea had 2 companies included, namely E-Mart and Hanjin.

Separately, the oil price crash caused by the 'war' between Saudi Arabia and Russia is also impacting corporate credit ratings. S&P recently downgraded the credit ratings of global oil companies ExxonMobil and GS Caltex from AA+ to AA and from BBB+ to BBB, respectively. Amid the stock market crash caused by COVID-19, the drop in oil prices is becoming an additional risk factor for companies.

This content was produced with the assistance of AI translation services.