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