While many companies ramped up borrowing to ensure they had adequate liquidity runways through the initial economic crisis, they now turn their attention to earnings growth and the ability and willingness of companies to pay down additional debt loads, said Moody’s Investors Service recently.
As the pandemic persists, companies face new risks, including delivering adequate earnings momentum and cash flow to manage or reduce the debt accumulated during the early phase of this unprecedented global health crisis, said Peter Abdill, a managing director with Moody's Corporate Finance Group.
"This is a particular challenge for companies in hard-hit sectors, including some companies rated low investment grade,” he pointed out.
According to Moody's, aggressive policy measures introduced early on in the pandemic allowed investment grade and non-investment grade companies alike to tap public and private credit markets to boost liquidity, causing debt to surge in the first half of the year.
The debt has broadly boosted cash and also funded earnings deficits for some companies, the credit rating agency added.
"The full impact of this leveraging event is largely dependent on the extent to which the virus is contained, and a meaningful recovery emerges in hard-hit sectors," said Mariarosa Verde, a Moody's group credit officer for the Corporate Finance Group. "It also depends on the extent to which better positioned companies pay down the debt or use it to pursue strategic goals, including acquisitions."
Rating agency analysts expect that many investment grade companies will continue to show resiliency to the economic stress caused by the global health crisis.
However some low-rated investment grade companies in hard hit sectors still face meaningful recovery challenges, Moody’s said.
In the first two quarters of the year, downgrades affected about 11% of global investment grade issuers, far less than the 34% of speculative grade issuers downgraded over the same period, the firm noted.
Beyond their large scale, significant competitive advantages and strong profitability, investment-grade companies have multiple levers that they can pull to make financial adjustments that boost liquidity in a crisis, the firm added.
It's these strengths that have traditionally helped them weather economic storms better than most non-investment grade peers, Moody’s pointed out.
“However, that uncertainty surrounding the resolution and duration of the pandemic has left an unusually high 34% of non-financial global corporates with negative outlooks,” Verde said.