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Moody's Downgrades U.S. Corporate Debt Rating to Negative

By Bram Berkowitz - Mar 31, 2020 at 11:34AM

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The U.S. has $6.6 trillion in corporate debt, and the Fed's bond-buying plans may not be enough to save credit quality.

One of the nation's three main credit rating agencies has downgraded its outlook on the corporate bond market from stable to negative, predicting that the coronavirus pandemic will lead to an increase in default rates.

Moody's Investors Service is warning that consumer-driven businesses such as airlines, hotels, and automakers will be hit particularly hard. But so too will the oil and gas sector as energy demand and prices continue to decline, and the banking sector, which will be dragged down by falling interest rates and deteriorating credit quality.

Money

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Boosted by a decade of extremely low interest rates, non-financial corporate debt has climbed steadily by 78% since mid-2009 to $6.6 trillion as of the end of 2019. 

"The coronavirus will cause an unprecedented shock to the global economy," Edmond DeForest, senior credit officer at Moody's, said in a report, according to CNBC. "We have revised our growth forecasts downward for 2020 as the rising economic costs of the coronavirus shock and the policy responses to combat the downturn are becoming clearer. Business activity will likely fall sharply across advanced economies in the first half of 2020."

As part of a massive quantitative easing program, which will involve buying large amounts of assets from the general market, the Federal Reserve has said it will buy corporate bonds to help the business community. But Moody's believes the Fed will only be able to do so much because it will only buy corporate bonds from low-risk companies with high credit quality.

CNBC reports that there could be further overall credit deterioration, and that some companies risk falling into junk status. Goldman Sachs estimates that $765 billion worth of investment- and high-yield bonds have experienced ratings downgrades already in 2020.

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