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Macy's, Renault credit downgrade rekindle fears

New York 

THE credit-rating downgrades of Macy's Inc and Renault SA to junk status are rekindling fears among investors of a potential uptick in so-called fallen angels after a run of relative tranquility in the US corporate bond market.

The American retailer and French carmaker each lost an investment-grade rating on Tuesday, affecting billions of dollars of debt. They follow Kraft Heinz Co, the iconic US packaged-food company, which was downgraded to junk by two credit raters last Friday as its turnaround shows little signs of progress.

Even though Macy's and Renault were downgraded for idiosyncratic reasons and will still trade in investment-grade indices unless another credit-rating company follows suit, their cuts bring back to the fore what had been a central concern among investors less than two years ago - that a slowing global economy could hamper companies' ability to service their obligations, especially those that had taken on significant debt loads to finance deals.

While many firms took actions to reduce debt levels in 2019, several are still proving to be susceptible to ratings risk. Kraft Heinz alone, with around US$21 billion of debt leaving the Bloomberg Barclays investment-grade index at the end of this month, nearly eclipses last year's fallen angel volume of just under US$22 billion, according to Bank of America Corp strategists. Macy's has about US$8 billion of total debt, while Renault's roughly US$66 billion is predominantly denominated in euros and yen, according to data compiled by Bloomberg.

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By year-end, the volume of fallen angels is likely to dwarf that of 2019, according UBS Group AG strategists led by Matthew Mish. They predict there could be as much as US$90 billion of investment-grade debt downgraded to high yield this year. Guggenheim Partners has said as much as 20 per cent of "BBBs" in the US, or US$660 billion, will get cut to junk in the next downgrade wave.

Macy's was cut one notch to "BB+" by S&P Global Ratings, which said the department store chain is failing to keep up with changing consumer habits. Of its total debt outstanding, just under US$2 billion trades in the Bloomberg Barclays investment-grade index. Renault was downgraded to an equivalent "Ba1" rating at Moody's Investors Service after the company posted its first annual loss in a decade. BLOOMBERG

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