Borrowing costs

Corporate borrowing costs soar amid default fears

Borrowing costs for businesses around the world are rising sharply despite central bank interest rate cuts, with ratings agencies warning that the economic impact of the coronavirus will lead to a wave of corporate downgrades and defaults.

Creditworthiness fears are prompting investors to put their money into the most easily marketable securities — such as short-term government debt — raising borrowing costs for top-rated companies and stifling credit for riskier ones.

The rating agency Moody’s estimates that the default rate for speculative companies could reach nearly 10%, with energy companies being particularly affected. This represents an increase from 2.3% a year ago and a historical average of 4%.

“I think the pandemic, coupled with falling oil prices and falling asset prices, is creating a severe and widespread credit shock across regions, sectors and markets,” said researcher Anne Van Praagh. at Moody’s. “The combined effects of credit are unprecedented. It’s unlike anything we’ve seen before.

Even highly rated companies that were able to sell bonds during the outbreak have agreed to deals that will increase their total funding costs by hundreds of millions of dollars as revenues are threatened by an economic downturn.

Average yield on investment grade corporate debt rose from a year-to-date low of 2.26% two weeks ago to 4.7% on Friday, according to an index run by Ice Data Services. .

“It’s brutal. We’ve never seen such a big move in such a short time,” said Monica Erickson, portfolio manager at DoubleLine. “It’s the fastest and deepest I’ve ever had, and I’ve been there since 2008.”

For high-risk junk-rated companies, the sell-off has been even more severe, with the average return of an index managed by Ice doubling this month to more than 10%.

Companies have scrambled to raise as much cash as possible, with about $60 billion in bonds sold by quality companies this week in the United States, including more than $16 billion on Friday.

The companies selling debt are all high-quality names, like a $5 billion bond sale for Coca-Cola and an $8 billion deal for Intel, the ones that aren’t at the top tier are still excluded from the capital markets.

“Companies are focused on increasing liquidity, removing guns and accessing cash where possible. They are preparing for the worst as we are in an unprecedented environment,” Ms Erickson said.