Some of the UK’s biggest companies are at risk of having their credit ratings downgraded and becoming “fallen angels”, ratings agency S&P has said, raising the possibility of a sharp rise in borrowing costs in the midst of the worst downturn since the 1930s.
Big names such as Next, British Airways and ITV are in danger of having their bond ratings downgraded from “investment grade” to “junk”.
Some of the world’s biggest companies issue bonds – effectively IOUs – as a way to raise money for investment. Credit ratings agencies give these bonds a rating to tell investors how safe the securities are.
Many investors are required to hold “investment grade” assets and so could be forced to sell the bonds of companies that lose that label. This raises the prospect that some firms might become unable to meet their obligations, as well as a general increase in strain on corporate bond markets.
S&P Global Ratings today said that a record number of companies around the world are in danger of having their credit ratings cut to junk as coronavirus hammers firms.
S&P said 111 companies are, in bond-market parlance, at risk of becoming fallen angels. It said 24 firms have so far taken the plunge.
It comes as many of the world’s biggest companies feel the strain from the biggest downturn since at least the 1930s. British Airways, for example, is cutting up to 12,000 jobs.
“Potential fallen angels are significant,” said Sudeep Kesh, head of S&P Global credit research. He said they could lead to firms facing higher capital costs and the need to revise contracts with bondholders, “or worse, could lead to the sale of the bonds in favor of more creditworthy companies”.
UK firms could face a jump in borrowing costs
UK firms Ashtead, British Airways, FCE Bank, GKN Holdings, ITV, Kingfisher, Next and Virgin Money are at risk of being downgraded, S&P said.
So far during the Covid-19 crisis, only Marks & Spencer has had its credit rating downgraded to “junk”.
The corporate bond market has grown massively in recent years, becoming vital to many firms’ operations.
It has come under severe strain, however, as coronavirus has all brought normal economic life to a halt. Retail firms such as Next and media groups like ITV are no longer looking like good investments.
Central banks around the world have stepped in to buy companies’ debt. The US Federal Reserve has been the most active, but the Bank of England has offered UK firms a helping hand.
Kesh said: “The financial sector led the additions to the potential fallen angels list, highlighting the challenges the sector is facing.”
“However, we see the highest downgrade potential in the lodging and leisure and auto sectors.”