Credit markets flash red as coronavirus hits corporate
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[March 19, 2020] By
Alwyn Scott and Kate Duguid
NEW YORK (Reuters) - 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
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 <.MERC0A0>. 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
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% of North American companies. Under its worst-case scenario
that number would jump to 45%
The costs to insure billions of dollars in debt of Royal Caribbean
Cruises Ltd <RCL.N>, American Airlines Group Inc <AAL.O> 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 <BA.N> and several airlines have been lowered.
CDS prices of Royal Caribbean have jumped 1,312% in the past month to
1,040 basis points, according to IHS Markit. Carnival Corp <CCL.N> was
at 655 basis points on Wednesday, up 1,164% from a month ago.
That compares with a 205% 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
American Airlines Group Inc <AAL.O> CDS prices were at 1016.407 basis
points Wednesday, up 622% 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.
"American Airlines' credit spreads suggest that it is at risk of
default," said Zox. "They do have significant liquidity and unencumbered
assets but this is a brutal environment."
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A trader works on the floor of the New York Stock Exchange (NYSE) in
New York, U.S., March 18, 2020. REUTERS/Lucas Jackson
Delta Air Lines Inc <DAL.N> CDS prices jumped 672% 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 U.S. carriers.
American Airlines and Delta Air Lines did not immediately respond to requests
for comment. The major U.S. airlines and Boeing sought tens of billions of
dollars in government aid this week.
Boeing and General Electric Co <GE.N> are affected by exposure to falling demand
for jetliners and engines, which are likely to stay low even after the virus
subsides. Analysts expect airlines to defer plane orders while they try to
rebuild their financial strength.
Boeing's CDS price hit 490 basis points on Wednesday, up 736%, from four weeks
ago, according to IHS Markit. The rise also reflected Boeing's exposure to
billions of dollars in costs from the grounding of its 737 MAX aircraft a year
GE's CDS prices were up 370% at 267.75 basis points on Wednesday, compared with
a month ago. More than two-thirds of GE's revenue comes from its commercial jet
engine business, which is the sole engine maker for the 737 MAX. GE also has $91
billion in debt, with $13.35 billion of bonds due this year, and expects a net
cash outflow in the first quarter.
To be sure, both companies have substantial cash and other assets on hand.
Boeing recently drew a $13.8 billion loan. GE has $35 billion in credit it can
tap and expects to receive a $20 billion cash infusion this month from the sale
of its biopharma business.
Boeing's current CDS prices are higher than those it hit during the financial
crisis, but GE's are not, Zox said.
GE has since sold most of GE Capital, the finance unit that nearly sank the
company during the financial crisis. GE Capital's CDS reached 733 basis points
in March 2009, Zox said.
A GE spokeswoman noted the company's significant cash assets on its balance
sheet. "We have a strong liquidity position with more than $17 billion at GE
Industrial, nearly $19 billion at GE Capital, and access to more than $35
billion of available credit facilities," she said.
On Monday, Standard & Poors cut Boeing's credit rating to BBB from A-minus,
saying it now expects cash outflow of as much as $12 billion this year, with an
inflow in 2022. S&P said Boeing remains on watch for further cuts due to weak
cash flow and "effects related to the coronavirus."
Boeing did not immediately respond to a request for comment.
(Graphic: Rising credit concerns,
(Reporting by Alwyn Scott and Kate Duguid in New York; editing by Greg
Roumeliotis and Leslie Adler)
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