Ford’s return to investment grade cements the era of rising stars

(Bloomberg) — Ford Motor Co.’s credit rating upgrade. to investment grade pulled $46.8 billion of debt from junk bond indices last month – helping the global benchmark asset class shrink by the most since 2005.

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The U.S. automaker this week earned a blue-chip rating from S&P Global Ratings, with the upgrade signaling a shift in corporate priorities as companies shore up their finances in the face of a potential recession. For some on Wall Street, this is just the beginning.

“There’s more to come,” said Matt Brill, head of North American investment-grade lending at Invesco Ltd. “We are more likely to see credit fundamentals improve even as the economy slows than the other way around, many people are concerned about.”

That’s a complete reversal from the start of the pandemic, when credit ratings drove the most brutal wave of corporate debt downgrades in history. Already, credit improvements this year have reduced the size of so-called fallen angel bonds — or debt that has been downgraded from investment grade to junk — to $142 billion from a total of $344 billion in 2020, according to data analyzed by the ICE BofA index from Bloomberg.

Ford’s upgrade means the global bad debt index shrank by a total of $73 billion — or nearly 4% — in October, marking the biggest monthly drop in size in 18 years.

And even as the focus turns to the risk of a recession as major central banks keep interest rates high, Bank of America strategists led by Yuri Seliger see little indication that the number of fallen angels will rise again. Less than 0.5% of the investment-grade universe trades at spreads wider than their junk-rated peers, they wrote in a note earlier this month.

“The fallen angel’s pipeline looks pretty thin,” compared to previous economic cycles, said Maria Stahely, senior portfolio manager at Fisch Asset Management. “This time, it appears that more companies are able and willing to take credit-friendly actions to preserve IG ratings.”

Barclays Plc strategists, led by Bradford Elliott, actually expect $70 billion to $90 billion of debt to be removed from junk to investment grade — the kind of upgrade it calls debt as rising stars — in 2024. Coty Inc., Cellnex Telecom SA and Britain’s retailer Marks & Spencer Plc are in line for potential rising star upgrades, according to the firm.

Representatives for Coty, Cellnex and Marks & Spencer did not respond to requests for comment.

Strategists, meanwhile, see only $20 billion to $40 billion of debt moving from high-rated to high-yield next year. However, others are still preparing for weak spots.

The increase in positive ratings activity comes ahead of what is expected to be a much tougher time, Bloomberg Intelligence analyst Joel Levington said in an interview on Tuesday. Still, bond raters are betting there’s enough cushion in their ratings to absorb the downside, he said, adding that “there’s a lot of doubt about that logic.”

In Europe, Barclays strategists, including Craig Nicoll, expect a net €15 billion ($15.9 billion) of fallen angels in 2024 as “the relentless rise in interest costs as debt is refinanced will put further pressure on finance’.

Rising Star Boost

Rising Star upgrades come with a clear set of benefits. S&P raised Ford’s rating to BBB- from BB+ on Monday, with a stable outlook. After this week’s move, Ford will be able to borrow at lower rates and have access to larger capital pools, making it easier to finance operations.

The spread between the yield on BBB-rated debt — the lowest level of investment grade — and BB-rated debt, the highest grade of junk, is about 1.46 percentage points, according to data compiled by Bloomberg.

The upgrade will also pull Ford’s bonds out of the fallen angel and junk indexes. The automaker accounts for nearly a fifth of the dollar-denominated ICE BofA Fallen Angels Index, making it its largest component. It is also one of the largest chunks of the euro-denominated amount weighing more than 4%.

The Fallen Angel indices will only reflect the change at the end of November due to cut-off date rules, according to a representative of Intercontinental Exchange, Inc., which publishes the indices.

And Ford is just the latest example. Occidental Petroleum Corp., another fallen angel in the pandemic downgrade cycle, gave up its junk status in May after an upgrade from Fitch. The promotion follows a similar move by Moody’s in March. Packaged food maker Kraft Heinz Co. also came out of junk status after a second upgrade from junk.

Representatives for Ford, Occidental and Kraft did not respond to requests for comment.

“During this cycle – and coming off the pandemic – companies haven’t had time to step up,” said Shanavaz Bhimjee, head of corporate bond research at ABN Amro Bank NV. “Basically, we have a limited environment for fallen angels.”

(Adds a chart of the change in junk market size, the magnitude of the monthly lead decline, and a fourth paragraph. An earlier version corrected a reference to rating movement in the chart note.)

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