Pedestrians walk past the Moody's Investors Service Inc. logo displayed outside of the company's headquarters in New York on Feb. 21, 2012.Scott Eells/Bloomberg
The long slump in commodity prices has opened the gates for the largest migration in the history of credit markets as rating companies review $160-billion of high-grade bonds that could end up as junk.
That's the amount sold by companies in the energy and basic-materials industries being reviewed for potential cuts or tagged with negative outlooks by Standard & Poor's or Moody's Investors Service, according to data compiled by Bloomberg. Any cuts would add to the more than $10-billion of so-called fallen-angel securities that have found a new home in the Bloomberg high-yield bond index, led by notes sold by Transocean Ltd., the world's largest offshore driller.
Curtailed access to capital amid a slump in global commodity prices could trigger the next wave of ratings cuts, according to a Bloomberg Intelligence report Friday. As the Federal Reserve prepares to change its more than six-year long policy of keeping benchmark rates near zero, companies face the risk of trying to tap tightening debt markets when they need to obtain financing.
"While markets anticipate higher credit risk due to commodity prices, the full effect may not be apparent until ratings actions are complete," Rich Salditt, a Bloomberg Intelligence analyst said in a telephone interview. "A significant growth in debt of these two sectors may present an extremely high concentration of commodity exposure that would need to be mitigated."
An extreme move by the rating companies may dwarf the previous two cycles, with $81-billion of auto-company debt falling to high yield in 2005 and $52-billion of financial- industry notes dropping to junk in the aftermath of the collapse of Lehman Brothers Holdings Inc., according to the report.
Energy investors are finding some comfort in the April rebound in oil prices, with the commodity rising 18 per cent and set for its biggest monthly gain in five years.
Energy-company bonds have gained 3.4 per cent this month, following a 13-per-cent plunge in the second half of 2014, Bank of America Merrill Lynch index data show.