• Only two companies in the US currently have a AAA rating (Microsoft and Johnson & Johnson). Previously a much larger number of companies (including Ford, GM, IBM, Dupont) were all in this list.
• Low interest rates reduce the incentives for companies to achieve AAA. No reason to get a good credit score as it’s not that much more costly to borrow now at lower ratings.
• BBB and BBB- ratings tiers have ballooned. As has corporate debt issuance more generally with a record $10trn outstanding in US corporate debt.
• McDonalds, Kraft Heinz all just above junk ratings.
• Risk is that with high debt/income ratios the economy will have more difficulty navigating an economic slowdown. It will also be easy for a larger number of companies to slide into junk status in any economic slowdown.
• CEOs are now seeing compensation tied to ratings. Debt diets are happening.
Why does this matter? Forecasts for Chinese, and world GDP growth, are being revised lower due to the coronavirus. There is an increasing likelihood that 2020 global GDP growth will slow below last year’s estimated 2.9% which was already the slowest in a decade. Any significant hit to demand and corporate profits in the US could trigger ratings downgrades and financing constraints given high debt levels. [Bearish global growth / US corporate credit]
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