In times of economic prosperity, companies tend to clean up their balance sheets, adapting their leverage, if they have it, to the company’s objectives thanks to the extra boost they receive from the growth situation and the greater room for maneuver to attract their own resources (at least through expansions or sale of shares). In any case, they are periods in which the balance sheets become strong to be able to hold up better in more difficult times.
From the shock caused by Covid in 2020, when companies stopped billing and had to go into debt to maintain their businesses when demand contracted, the economy began a period of recovery, in parallel with a rebound in inflation that led central banks to having to raise interest rates. During this time, the improvement in growth helped companies heal their balance sheets and the rating This was reflected in their ratings, with more increases than decreases.
Now the context is changing since, on the one hand, growth has begun to show signs of clear weakness and, on the other, central banks have begun to lower interest rates as they see price inflation under control and health at risk. of the economy, both in the US and in the Old Continent.
This context of deceleration has not reduced the credit quality of the business sector and proof of this is that so far this year the S&P agency has improved the rating to practically the same companies that it has downgraded. In Western Europe, the ratio is 1.17 rises for each decrease, there were 331 improvements and 283 cuts, a proportion in line with that of the last two years.
However, what Vontobel highlights is that many of these improvements in ratings credit are occurring within the investment grade universe. “Global investment grade credit has been enjoying a strong improvement in credit quality post-pandemic; many companies have been cautious in spending their high cash balances, focusing more on improving their credit metrics such as leverage or interest coverage,” they explain. “Rating agencies have rewarded this effort with a series of improvements in all types of bonds, particularly within investment grade,” they add.
“With fewer BBB rated companies, the credit quality of the IG indices has improved and the favorable trend reduces the probability of downgrades and improves the quality of underlying corporate bond investments,” they add. Last year, a historical record was set for improvements from BBB to A in absolute terms (more than 120 billion dollars) and this year, if it ended like this, it would already be the second best in history, according to Vontobel.
“In addition to strong fundamentals, investors in IG corporate bonds also benefit from attractive yields and recent strong fixed income returns. In Europe, they are yielding around 4%, significantly higher than in the last decade, and This is the key driver to attract investors, more than fluctuations in spreads,” they explain. “It is not unusual, therefore, for new issues of investment grade corporate bonds to register average subscription rates of 3.5 times, thanks to this fundamental environment and default rates in the lower band of this forecasts. year,” they conclude.
If we look at the decisions made this year by S&P, there is a better tone if only the IG universe is analyzed. In the United States there has been 1.72 rises for every fall while in Europe the relationship has been 2.17 to 1which contrasts with 2021, when there were many more decreases than increases (see graph).
In Spain
The health of companies in Spain is also in a good moment. S&P, with just over two months left until the end of the year, has improved the rating of 26 companies and has only lowered the grade of five, among them Prosegur and its subsidiary and Grifolsin what is the best proportion since 2018. And, excluding those that are speculative, there have only been 11 improvements due to no cuts, among which stand out Enagás, Merlin, Cellnex and Sabadell.
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