NEW YORK: From airlines and cruise lines to retailers and energy companies, investors are fleeing large pockets of the corporate credit market, worried that the coronavirus pandemic will lead to bankruptcies, defaults and credit rating downgrades.
The premium investors demanded to hold riskier junk-rated credit rose to 904 basis points over safer Treasury securities on Wednesday, its highest level since 2011, according to the ICE/BofA high-yield index
The premium for safer investment-grade credit rose to its highest since 2009, at 303 basis points over Treasuries, based on the ICE/BofA investment-grade index. The risk premium for both has roughly tripled since the start of the year.
With liquidity rapidly drying up in short-term funding markets and more companies drawing down on their credit lines, the Federal Reserve has taken a raft of measures over the past week to ease the strain, including urging banks to use its discount window and providing cash through the commercial paper markets. The unabated rise in corporate borrowing costs, however, shows that strains in the financial system remain.
Airlines, auto suppliers, apparel, gaming, lodging and leisure are among the sectors that will be most affected in the short term, according to credit ratings agency Moody’s Investors Service Inc. Under its baseline scenario, Moody’s expects the coronavirus outbreak to negatively affect around 16 per cent of North American companies. Under its worst-case scenario that number would jump to 45 per cent
The costs to insure billions of dollars in debt of Royal Caribbean Cruises Ltd, American Airlines Group Inc and other companies have also soared, as investors fret that slowing growth could overwhelm the companies’ ability to repay debt.
These credit default swap (CDS) prices provide a kind of heat map showing the perceived credit risk from the travel bans and halted business activity that the pandemic has triggered. Some economists said this week that the global economy is already in a recession, and credit ratings of Boeing Co and several airlines have been lowered.
CDS prices of Royal Caribbean have jumped 1,312 per cent in the past month to 1,040 basis points, according to IHS Markit. Carnival Corp was at 655 basis points on Wednesday, up 1,164 per cent from a month ago.
That compares with a 205 per cent increase in an index of 125 investment-grade companies over the same period. The cruise industry has been hit especially hard after the virus spread via several ships leading to passenger quarantines.
Royal Caribbean and Carnival did not immediately respond to requests for comment.
American Airlines Group Inc CDS prices were at 1016.407 basis points on Wednesday, up 622 per cent from a month ago. Levels of 1,000 points or more indicate default fears, said Bill Zox, chief investment officer for fixed income and a portfolio manager at Diamond Hill Capital Management in Columbus, Ohio.
Delta Air Lines Inc CDS prices jumped 672 per cent in the last month to 502.124 basis points on Wednesday, according to IHS Markit. By that measure, it is the safest credit risk of the major US carriers.
— Reuters
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