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JPMorgan sees 'early signs' of stress on credit and funding


THE fallout from the global spread of Covid-19 may be starting to affect credit and funding markets, according to JPMorgan Chase & Co.

Supply chain disruptions and demand shock from the virus fallout could already be causing cash-flow problems for businesses, JPMorgan strategist Nikolaos Panigirtzoglou wrote in a note on Friday. That's probably even more true for smaller companies and those in sectors like travel and lodging, he said.

"If these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout from the Covid-19 crisis," Mr Panigirtzoglou said. Unless "credit support by central banks and/or governments is broad, fast and direct, we note credit markets are facing an increased risk of the cycle turning with a lot more downgrades or even defaults over the coming months".

Market concerns about ratings downgrades and companies dropping to junk status are justified by a look at credit fundamentals, the JPMorgan report said. The median net-debt-to-Ebitda ratio for companies in JPMorgan's high-grade and high-yield companies in the US and Europe has risen steeply in the past decade and is now higher than in the previous two cycles in 2007/2008 and 2001/2002, it said.

"Companies are currently much more vulnerable to a decline in incomes and/or a rise in corporate bond spreads and yields than in the previous two recessions," Mr Panigirt-zoglou wrote. "This is especially true for US credit and for euro high yield given the absence there of the backstop from the European Central Bank's corporate bond programme that solely benefits euro high grade."

There are signs of stress in Yankee issuance as well, the report said, noting it tends to be more sensitive to funding concerns because non-US companies can find it harder to raise dollar funding relative to domestic US companies in periods of stress.

"Rate markets are now implying that something that looks like a US recession is almost a certainty and have become even more disconnected from risky asset classes," Mr Panigirt-zoglou wrote. "US credit seems to be still most vulnerable to US recession risks followed by US equities." BLOOMBERG