Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.

Dire Predictions of Corporate Debt Appear Overstated

Prior to the coronavirus pandemic, many corporations viewed corporate debt markets a cheap source of capital. As a result, they loaded up their balance sheet with bonds in anticipation of higher rates in the future. When the virus cases escalated and decisions were made to lockdown the economy, many experts predicted wide-scale downgrading of bonds from investment grade to junk status (aka, fallen angels). Now that the worst of the virus cases are behind us, let’s take a look at the current state of the corporate bond market.

The accompanying chart shows several bond market metrics reflecting its health. To be fair, the number of downgrades to junk status clearly hit record volumes (see Fallen-angel debt tally chart). However, they appear to have fallen short of many experts’ expectations.

Many attribute the lack of downgrades to the Federal Reserve extending its corporate bond purchase programs to issuers losing their investment grade rating. This step, taken in April, helped open the funding markets to these troubled firms and kept them in business.

The other reason cited for the fewer downgrades is the amount of cash on hand. When the Fed cut interest rates to zero, firms traded shorter-term borrowings for longer-term debt and kept the proceeds as emergency cash to help them weather the pandemic. During an economic crisis, liquidity becomes paramount, so firms boosted their cash reserves to maintain solvency.

The above isn’t to suggest firms are totally free of future financial concerns, but their actions have certainly bought more time. Now we need the economic recovery to continue and life return to normal, so the hardest hit firms regain their footing before their cash runs out.

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