The Business Times

Concern rises over more bonds being rated as junk

Published Tue, Feb 19, 2019 · 09:50 PM
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ASIA'S dollar bond markets have staged a blistering rally this year, but for a group of borrowers sitting on the cusp of a junk rating, there's no relief in sight.

As worsening global macro-economic conditions put firms under pressure, concerns over so-called fallen angels, or investment-grade companies that are cut to junk, are mounting in Asia and globally. Man Group Plc, the world's largest publicly traded hedge fund manager, warned investors in December of the "astonishing bubble" in BBB level debt.

The US-China trade war and jitters over a slowdown are prompting worries that weaker companies could falter. Moody's Investors Service cut Bharti Airtel Ltd, India's second-largest wireless carrier, to junk this month and downgraded five Asian companies in January, but made only two upgrades.

A move to below investment grade raises borrowing costs and also prompts a wave of forced selling by investors who may be unable to hold junk securities.

Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments, who has seen more fallen angels in the region this year, said: "The macro picture remains a major headwind for the investment market. Some companies are likely to face more margin pressure and operational challenges."

Globally, an era of easy money has fuelled borrowers to take on leverage and they remain vulnerable to any tightening in liquidity. In Asia, major elections in countries like India could also throw up surprises for investors, and add to the volatility.

At least eight Asian companies' bonds were cut from investment grade to junk last year, an increase from four in 2017, according to Bloomberg-compiled data.

Borrowers that are on the brink include India's state-owned Power Finance Corp and REC Ltd, both rated a step above junk by Moody's and Fitch Ratings. Indian chemical giant UPL Ltd's bonds are also on the edge of becoming non-investment grade.

Manjesh Verma, head of Asia credit sector specialists at Citigroup Inc, said: "There are more issuers on the borderline with a worsening credit profile. We see rising fallen angel risks." Some bonds on the cusp of junk are "mispriced" and price declines would be "significant" if these companies drop to junk grade, he said. BLOOMBERG

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