High-yield companies in the consumer goods, healthcare and entertainment industries are increasingly at risk of credit downgrades and even defaults as they battle rising interest rates and falling revenue, forcing some finance chiefs to consider alternative financing options.
Default rates for low-rated U.S. companies will likely reach 3.75% for the 12 months ending in September 2023, up from 1.6% in September 2022, but lower than the long-term average of 4.1% and the 6.3% default rate in September 2020, ratings firm S&P Global Ratings said in a report earlier this week.
That expected doubling in default rates shines a spotlight on speculative-grade rated companies such as drugstore chain
Bed Bath & Beyond Inc.
Herbalife Nutrition Ltd.
, which makes protein shakes and supplements. Each of these companies was downgraded by at least one ratings firm in recent weeks.
While it is unclear whether the downgrades will turn into defaults, the ratings firms’ warnings come at a perilous moment. The Federal Reserve has lifted interest rates to levels unseen for over a decade, bringing the benchmark federal-funds rate to 3.75% to 4.00% earlier this month. At the same time, the economy has been losing steam, resulting in lower earnings and darkening the outlook for companies, especially in consumer-facing sectors.
The recent buildup of companies rated B minus—or six notches below investment grade—could contribute to a sharper deterioration of credit ratings among businesses if inflation and debt-servicing costs remain high or increase further and supply-chain issues persist, S&P said. Credit downgrades can drive up financing costs for companies and cause executives to take additional action such as reducing debt loads.
Struggling businesses should consider options to restructure their balance sheets, potentially by selling equity, disposing of minority stakes or cutting costs, said
vice chairman and head of commercial banking at
Citizens Financial Group Inc.,
a bank. “If there’s a downward trajectory in your rating, it probably portends credit deterioration at the core,” he said.
Fitch Ratings on Nov. 9 downgraded Rite Aid’s long-term default rating to C from B—down three notches—after a proposed tender for $385 million in bonds that Fitch described as a distressed exchange. The Philadelphia-based company last month said it is facing higher costs related to its plan to close stores and warned of rising pressure on consumer spending and its supply chain for the rest of the year.
Union, N.J.-based Bed Bath & Beyond in September said it was considering liability management transactions—which typically allow companies to refinance or restructure outstanding obligations—tied to $284 million in bonds due in 2024. Ratings firm Moody’s Investors Service last month downgraded the company’s rating to Ca from Caa2, a two-notch drop, citing a “very high likelihood” of a default over the next 12 months. S&P on Nov. 14 downgraded the company to selective default from CC over a distressed exchange, the offer for which Bed Bath & Beyond extended two days later.
Rite Aid and Bed Bath & Beyond didn’t immediately respond to requests for comment.
Companies six to eight notches below investment grade need to generate positive cash flow, in part because they may have to refinance, said
chief analytical officer for corporate ratings at S&P Global Ratings. Executives should “batten down the hatches and be able to show that you can be self-funding through this difficult period ahead,” Mr. Lemos-Stein said.
S&P so far this year through the end of October has issued 215 U.S. corporate credit downgrades—for both high- and low-rated companies—up from 158 the prior-year period but down from 759 in the 2020 period, when the Covid-19 dented companies’ earnings. There were 33 S&P downgrades in September, the most in a single month since June 2020. But the total number of downgrades remained smaller than that for upgrades, which stood at 233 at the end of October, down from 361 during the prior-year period.
Junk-rated companies in recent months have been searching for the right time to tap investors, with some agreeing to pay more for their debt and others renegotiating with lenders or seeking additional funding in the private-credit market. “The impact of rising rates on businesses that are low rated and mostly financed in the floating-rate market is going to be hard for a lot of companies to absorb,” said
head of the leveraged finance practice at Moody’s.
U.S. businesses are being downgraded in part due to deteriorating cash flow and profitability levels, though the circumstances are often company-specific, Mr. McCree said. Credit conditions, particularly for companies below investment grade, will likely continue to tighten as the Federal Reserve continues to tighten its monetary policy. How much companies will suffer depends on the depth and the duration of a potential recession, ratings professionals said.
Businesses without immediate refinancing needs, however, tend to see less of a direct impact from credit downgrades. S&P last week downgraded Herbalife, the Los Angeles-based nutrition company, by one notch from BB- to B+ after it reported a 9.5% drop in revenue to $1.3 billion and a 30% decline in net income to $82.2 million, both compared with the prior-year period. S&P said high inflation reduced consumer demand for Herbalife’s products.
But the downgrade has minimal financial impact on Herbalife because the interest rate on its current debt doesn’t depend on the rating and it doesn’t need to refinance in the coming years, Chief Financial Officer
said. The company has about $550 million in convertible debt maturing in 2024 that it plans to pay down with a revolving credit facility, he said.
“Obviously the company would prefer if S&P didn’t arrive at issuing the downgrade, but we understand why S&P cited macroeconomic conditions as the catalyst for the downgrade,” Mr. Amezquita said.
Write to Mark Maurer at email@example.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Some companies try too hard to stand out. Consequently, they may create an offensive or insensitive ... [+] campaign.Yan from Pexels Failing despite having the
“We are not looking at starting and fighting a battle with the other big exchanges — going after large-cap organizations,” Jos Schmitt, chief executive
June 2 (Reuters) - Amazon.com Inc (AMZN.O) is in talks with wireless carriers Verizon Communications (VZ.N), T-Mobile US Inc (TMUS.O) and Dish Network Corp (DIS
You might think that news of “major AI breakthroughs” would do nothing but help machine learning’s (ML) adoption. If only. Even before t