The line between investment grade and distressed trading levels is muddling fast for several issuers as investor concerns over the new coronavirus slam headlong into the IG market, according to four buysiders.
Occidental Petroleum’s capital structure cratered this week after it became a crossover high yield name following a downgrade, while IG issuers Marriott International, Boeing, and Delta Airlines have quickly entered the trading fray of distressed borrowers, the sources added.
“The worlds are merging. People are coming to high yield traders for investment grade names,” one of the sources said.
A large swath of the IG market could be subjected to similar trading volatility, with as much as USD 627bn of IG debt at risk of a downgrade, according to a report yesterday from analysts at UBS.
“Downgrade, not default, risk is the primary concern, and we consider the USD 627bn of BBB high exposure debt to be most at-risk (or about 12% of overall IG),” the analysts wrote. “Currently about USD 142bn in IG debt is trading at spreads in-line or wider than BB levels, and USD 286bn in total is trading at or wider than BB+ levels.”
Occidental’s capital structure plummeted Wednesday after Moody’s downgraded the company to Ba1 from Baa3 on its ability to address maturities and generate free cash flow in a depressed oil price environment. The company, which still holds a BBB rating from S&P, has more than USD 6bn of debt maturing in 2021, according to SEC filings.
“The market is closed [for them] right now. They better hope things shake out pretty fast so they can start refinancing in the fall,” one of the sources said of Occidental’s refinancing potential.
Occidental’s USD 1.5bn 2.6% senior unsecured notes due 2021 crashed to trade as low as 60.5 and a yield of 43.33% yesterday from trades at 90 yielding 10.5% on 17 March. Its USD 500m 2.684% senior unsecured notes due 2021 plummeted to 63 to yield 64.359% yesterday from trades at 93.25 yielding 10.83% last week, according to MarketAxess.
In another example, Marriott’s Baa2/BBB rated notes plummeted to distressed levels yesterday after the company provided a business update, effectively withdrawing guidance for the year and disclosing a revolver draw “to support commercial paper maturities”.
Its USD 350m 3.375% senior unsecured notes due October 2020 fell yesterday to 81.5 to yield 44% from trades at 100.63 to yield 1.8% in late February. The notes recovered to trade at 90 to yield 23.4% later in the afternoon.
Boeing’s notes traded down after the company disclosed this week that it is requesting USD 60bn of aid to face down liquidity repercussions from the virus.
“Technically Boeing is investment grade so I shouldn’t be looking at it but here we are,” one of the sources said. “Do I think Boeing will become high yield? Most definitely. Do I think it will go bankrupt? It’s not a zero percent chance but it doesn’t seem that high to me yet.”
Boeing’s Baa1/BBB USD 350m 1.65% senior unsecured notes due 2020 last traded yesterday at 93.5 to yield 13.213%, up slightly from trades at 90.5 to yield 18.814% on 18 March. This compares to last week’s levels of 97.936 and a yield of 5.074%.
The USD 300m 2.125% senior unsecured notes due 2022 last traded yesterday at 87.25 to yield 9.475%, compared to trades at 96.87 to yield 3.803% on Monday.
Delta Air Lines’ Baa3/BBB- rated bonds fell to distressed levels as airlines become more pressured and domestic and international travel is threatened.
The USD 600m 3.4% senior unsecured notes due 2021 last traded yesterday at 89 to yield 14.866%, down nearly 10 points from trades at 97.25 to yield 6.04% last week. The USD 450m 2.6% senior unsecured notes due 2020 last traded on 17 March at 93.5 to yield 12.455%, compared to trades at 98.125 to yield 5.295% last week.
Downgrades or distressed trading levels for IG issuers could present novel issues for both borrowers and investors, such as access to unsecured revolvers in a downgrade scenario and additional priming capacity for liquidity, according to a report last week from Xtract Research.