(Bloomberg) — As Boeing Co. is reduced to junk status, it will be the largest US corporate borrower ever to lose its investment-grade rating, flooding the high-yield bond market with a record volume of new bonds to be absorbed.
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On Tuesday, S&P Global Ratings said it is considering downgrading the aircraft maker to junk as strikes at production sites continue, hurting output. Last month, Moody’s Ratings said it was considering a similar move. Fitch Ratings has highlighted the growing risks but has not yet announced a revision.
If two of Boeing’s three major rating agencies were to downgrade its rating to junk, much of Boeing’s $52 billion in outstanding long-term debt would no longer be eligible for inclusion in investment-grade indexes. If that happens, Boeing would become the biggest fallen angel ever — industry parlance for a company that has lost its investment-grade ratings — based on index-eligible debt, JPMorgan Chase & Co. analysts said.
“Boeing is no longer welcome in the investment-grade index,” said Bill Zox, portfolio manager at Brandywine Global Investment Management. “But the high-yield index would be honored to welcome Boeing and its many coupon increases.”
A Boeing spokesperson declined to comment for this story.
‘Idiosyncratic credit situation’
JPMorgan is not taking a position on the likelihood of Boeing moving to junk, or what such a transition would mean for credit fundamentals, strategists led by Eric Beinstein and Nathaniel Rosenbaum wrote in a note Thursday.
There could be a relatively seamless transition, the strategists wrote. Credit spreads are tight trading conditions and relatively liquid trading in both the high-value and high-yield markets, the strategists wrote. Much of Boeing’s debt has a coupon-increasing feature, with rates rising 0.25 percentage points for every step below investment grade that each rating firm downgrades, which could make it more attractive to some investors, including insurers.
“Typically, downgrades from high-grade to high-yield bonds occur around economic downturns or crises,” the analysts wrote. “This is an idiosyncratic credit situation, should there be a downgrade. No other great fallen angel has ever moved with such tight spreads.”
The corporate bond market has grown in recent years, so even if Boeing has more debt than other borrowers in the past, this market takes up a smaller slice of the investment-grade universe. The company makes up just 0.7% of Bloomberg’s investment-grade U.S. corporate bond index. When Ford Motor Co. and General Motors Co. were downgraded in 2005, they took up 8.3% and 3% of the high-end market, respectively, according to JPMorgan.
But there are also reasons why the transition could potentially result in large price movements for the company’s debt. Boeing’s $52 billion debt load is large by junk issuer standards. And the country has a relatively high share of longer-term debt, while most high-yield investors focus on shorter- and intermediate-term securities to help manage credit risk.
High-value and high-yield funds, which bundle bonds based on factors such as credit quality and duration to provide investors with regular returns, could also be affected. Over the years, more passive fund investors have gathered in the high-quality market, which JPMorgan said would mean a greater volume of “forced sellers” if Boeing were downgraded.
“I would expect to see a fair amount of index-related selling as debt changes hands between the investment-grade and high-yield markets,” said Scott Kimball, chief investment officer at Loop Capital Asset Management. “I wouldn’t be surprised if things got ugly, as high-yield investors generally aren’t that dependent on benchmarks.”
Because active high-yield managers will not be “forced buyers,” they will have a greater degree of price-setting power, according to Kimball.
“The costs of transferring liquidity are real,” he said. “Buyers of high-yield bonds, which are less index-oriented, are the ones who set the price. It is the opposite of upgrades where passive money is more common.”
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