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The funds estimate that up to 300,000 million in bonds can go down to the 'junk' level



A big storm is brewing on fixed income. Nearly € 300 billion in corporate bonds from the United States and Europe are at risk of falling to the 'junk' level because of the Covid-19 crisis. In the North American country, moreover, some experts point to default rates of 12% this year, which could be as high as 45% in some sectors. It is a great challenge not to be dragged down by fund managers and, above all, a concern for conservative investors.

About $ 215 billion in US bonds (more than 197 billion euros) and $ 100 billion in European bonds are expected to see their ratings downgraded to 'high yield' this year, that is, the debt of high performance or 'junk'.

In the US, the volume of outstanding BBB-rated bonds, the lowest investment grade, is currently equivalent to 70% of the entire US 'high yield' bond market. Since the great financial crisis of 2008, the face value of BBB bonds has grown steadily and faster than the 'high yield' market.

"With a recession on our heads, many zombie companies risk falling into 'high yield' territory and becoming fallen angels. Fallen angels, which will for the most part go from BBB to BB, will inflate the size of the index's BB segment, forcing passive and active strategy fund managers to reassign positions from the highest risk categories to respect restrictions. of the reference indices ”, advances Marty Dropkin, global director of Analysis of the Fixed Income area of ​​Fidelity.

Normally, the rating downgrades, and more if they are at the "junk" level, lead to sharp falls in the bonds. When this happens, the funds that hold them in portfolio also lose value and, given the higher risk of bankruptcy of the issuing company in question, the managers choose or are forced by prospectus in some cases to sell them. But they don't always find someone who wants to buy them, which is called the counterpart, especially in periods of market stress and economic uncertainty like the current Covid-19. In Spain, there has already been a case of corralito in investment funds for lack of a counterpart in certain bonds. Esfera Capital Gestión has imposed subscriptions, transfers and partial redemptions to three of the funds advised by the securities agency Gesem until the problem is solved with a couple of affected issues.

Furthermore, "a massive dispersal and Fed action will not be able to do much against the rating downgrades and debt defaults," believes Christian Rouquerol, director of sales for Iberia at Tikehau Capital. The French manager expects the 'fallen angels' (or fallen angels) to represent 10% of the investment grade market in the US, "a considerable number", and between 17% -18% for the entire universe of BBB bonds. The levels of the ‘default’ rate expected for this year are above 10% -12%, but with peaks of up to 40% -45% for certain sectors, Tikehau warns. Without going further, American carmaker Ford has recently become the biggest fallen angel in history as a direct consequence of the current crisis.


According to Michael McEachern, portfolio manager and head of Listed Markets at Muzinich & Co, "the recession will be short and severe" and, in this scenario, "default rates are expected to be higher, especially in the energy sector, affected by the fall in oil prices, but other sectors will also be affected by the quarantine measures, such as airlines and leisure. " The already planned debt restructuring of Diamond Offshore has caught Spanish funds and sicav like Azvalor, Salmón Mundi or Elcano, among others, who have been dragged down by contagion to the listing of their shares.

The energy sector is the most at risk of deterioration, since it is at the epicenter of excess supply and shock in demand due to the coronavirus. Dropkin of Fidelity calculates that around 60,000 million dollars (about 55,000 million euros) of 'investment grade' debt issued by companies that operate in the first links of the energy industry have already been downgraded to 'high yield', within a volume of around 90,000 million dollars (about 83,000 million euros) in intermediate risk.

With this context so critical for companies, "only companies with a solid balance sheet or the ability to reinforce it will be able to endure the economic impact of this brutal stoppage in economic activity and will emerge as potential winners," predicts McEachern, from Muzinich.

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