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Credit market fears of downgrades have not materialised

Like a lapsing gym membership, companies' commitments to go on a debt diet this year have been showing signs of waning.

Article originally published by The Financial Times. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

Like a lapsing gym membership, companies’ commitments to go on a debt diet this year have been showing signs of waning.

This week, pharmaceutical company AbbVie borrowed $30bn from bond investors to help fund its $83bn acquisition of Allergan, pushing its total debt outstanding close to $100bn and making it one of the most indebted companies in the world.

After the deal was lapped up by investors, chatter on trading desks turned to speculation surrounding a possible buyout of drugstore Walgreens Boots Alliance by private equity firm KKR — a deal that could involve another borrowing splurge.

What do the two companies have in common? Both AbbVie and Walgreens are rated at the lower rungs of the investment-grade ladder — a group of borrowers classified as triple-B that has ballooned in recent years as companies have taken advantage of low borrowing costs and loaded up on cheap debt.

Last year, nervous attention focused on the expanding universe of debt clinging on to investment-grade ratings, as concerns over slowing global growth fanned fears that a potential downturn in the US economy could lead to a series of downgrades.

As corporate bonds slip from the investment grade market, they could lose the support of investors bound by mandates to buy only higher quality debt. Instead, those so-called fallen angels end up relying on demand from the much smaller high-yield bond market, typically pushing borrowing costs higher.

Some fret that an unexpected tightening of monetary conditions or an economic downturn could hit this sector hard. “If the economy falters, it gets scary quickly," said Peter Tchir, chief macro strategist at Academy Securities. 

But those fears are now easing. A shift to more supportive central bank policy has provided a prop for credit markets and the few downgrades that have emerged have done little to derail the recent rally.

Analysts at Bank of America noted this week that gross leverage among investment-grade companies increased in the third quarter, propelled by a blowout September that proved to be the heaviest month of issuance on record. But that rise in leverage has been small.

That is because, as the bank’s analysts point out, much of the new borrowing stems either from refinancing activity or from companies that had previously been more restrained. Optimists argue that this makes sense in a cheap money environment.

AbbVie is in that category despite its bumper bond. It still holds a single-A credit rating from Standard & Poor’s, despite being dragged down by both Fitch and Moody’s rating the company at the upper end of triple-B. Meanwhile, companies that have already ratcheted up their outstanding debt, such as AT&T, have reiterated commitments to reduce leverage.

All this suggests that leveraged companies are sticking to plans to cut debt, but less leveraged companies are indulging in more borrowing. Perhaps those debt diets are not so far off-track after all.


This article was written by Joe Rennison from The Financial Times and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Article originally published by The Financial Times. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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