The BBB-Rated Expanse: A Mass of Fallen-Angels or a Gentle Giant?
In October 2018, we published our views on the growing glut of BBB-rated corporate debt. The headline takeaway was the following: longer-term we have concerns, but shorter term a downgrade cycle did not appear imminent. In our multi-sector strategies, this view helped us capitalize on the December volatility and position our portfolios for the bounce back and strong rally in credit markets to start the year.
Since we published our view, ominous headlines about growing BBB debt and highly leveraged companies have only continued to mount. Given this headline noise, we have prepared a more detailed follow-up to help our clients navigate this volatile and uncertain market backdrop.
Downgrade cycle imminent? Depends on how you look at it.
Analyzing risk and opportunity requires a comprehensive view of not only historical market performance, but also current market conditions. Leverage, while certainly important, requires context to account for market fundamentals and characteristics that are unique to this credit cycle. As we noted in our initial post, although leverage has increased for investment grade companies, much of this increase has been the result of M&A transactions by larger companies that have several levers to pull to ensure they remain investment grade. We have also observed that many of these companies are higher quality companies that operate in defensive sectors, which should help insulate them from an economic downturn.
Figure 1. Leverage is not the only lens to view current credit market risk
Source: Moody’s, Worldscope, Bloomberg Barclays Index Services Limited, UBS. As of 9/30/18.