Record number of firms in 'crossover zone' due to Covid-19, oil price shock: Moody's

A RECORD high of 96 non-financial companies have entered the "crossover zone" - the credit ratings closest to the line between speculative grade and investment grade - by the end of the first quarter this year.

This is an increase of 26 firms compared with the end of 2019, Moody's Investors Service said in a global report on Thursday.

The surge in these "crossover zone" companies was driven by deteriorating global economic conditions, sharp commodity price declines and significant financial market volatility due to the spread of the novel coronavirus, said Michael Corelli, a Moody's senior vice-president.

"These factors resulted in a severe and extensive credit shock across many sectors, regions and markets," he added.

The agency's "crossover zone" comprises potential fallen angels as well as potential rising stars.

Potential fallen angels are investment-grade companies that are rated Baa3 with a negative outlook or put on review for downgrade, and thus might fall into the speculative grade. The number of such companies soared to 76 during the first quarter this year, from 43 in the previous quarter.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Potential fallen angels held US$593 billion in debt at the end of the first quarter, spiking from US$341 billion at the end of 2019.

Fundamental credit developments accounted for all but one of the 47 new potential fallen angels entering the "crossover zone" in the first quarter, with 43 of these due to fallout from the Covid-19 pandemic, Moody's said.

The increase was attributable mainly to General Motors and Kraft Heinz Foods in the US entering the "crossover zone" with about US$29 billion in debt each, along with Delta Air Lines with US$22 billion and AP Moller-Maersk with US$17 billion.

On the other side of the zone, the number of potential rising stars shrank to 20 for the first quarter, from 27 in the prior quarter.

Potential rising stars are speculative-grade companies rated Ba1 and put on review for upgrade or given a positive outlook, and might possibly become investment grade.

Of the 12 potential rising stars that exited the "crossover zone", nine were left because of negative rating or outlook actions.

Seven of these nine actions were related to the coronavirus outbreak, two were due to fundamental reasons, while three were upgaded to Baa3 because of positive credit developments, Moody's said.

Potential rising stars held US$160 billion in debt at the end of Q1 this year.

There were eight investment-grade companies that skipped the agency's "crossover zone" altogether, being downgraded straight to speculative grade. They held a combined US$92 billion in debt, with US$40 billion from US oil giant Occidental Petroleum Corp.

Including the eight, 21 companies had crossed over to speculative grade in the quarter, and "more will likely be forthcoming with potential fallen angels climbing to the highest level since we began tracking this data in 2008", Mr Corelli said.