Why Moody’s Sees More Credit Problems on the Horizon

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Currently, there is a record number of highly leveraged non-financial companies around the world, which ultimately could spell disaster should another financial crisis hit. These firms are setting the stage for what could be a particularly large wave of defaults, according to Moody’s.

Looking at the near term, the credit outlook is benign and the speculative-grade default rate remains low. However, the non-financial corporate debt burden today is higher than its peak before the 2008/2009 financial crisis.

A decade of low growth and low interest rates has been a catalyst for formidable changes in non-financial corporate credit quality, Moody’s says. And companies with speculative-grade ratings now account for 60% of all rated non-financial companies. About 40% of non-financial companies are rated B1 or lower. At the same time, the majority of investment grade companies are rated Baa, the category bordering speculative grade.

Moody’s believes that the already very large population of speculative-grade issuers is likely to continue to grow before the next credit downturn.

The credit rating agency went on to say that investor demand for higher yield continues to allow all but the weakest companies to avoid default by refinancing maturing debt. Some very weak issuers are living on borrowed time while benign conditions last.

Mariarosa Verde, Moody’s senior credit officer, said in a recent report:

The ranks of low rated issuers continue to swell due to easy market access in a stable credit environment where investors have been reaching for yield. At the same time, the opportunity to borrow at low cost for mergers and acquisitions and to return capital to shareholders via dividends or share repurchases has proved irresistible for some investment-grade firms, leading some to adopt financial policy objectives that have led to lower ratings.