The number of companies most at risk of losing their investment-grade ratings – the potential fallen angels – in Asia excluding Japan and Australia climbed to 21 as of June 2, 2020 from eight at the end of 2019, due to lower earnings and cashflow caused by the global coronavirus shock, said Moody's Investors Service in a new report.
Some have joined the list following India's downgrade (Baa3 negative), given their links to the government, the credit rating agency pointed out.
"Potential fallen angels now account for just over 10% of our investment-grade portfolio, which is still below the 16% recorded in May 2009 but at an all-time high in terms of absolute numbers," said Annalisa Di Chiara, a Moody's Senior Vice President.
Aside from the six Indian government-related or linked companies, these companies operate in sectors most exposed to coronavirus disruptions, including auto, steel and REITs," Di Chiara observed.
Altogether, the 21 potential angels have around US $3.3 billion of rated bonds maturing through 2021, with government-related or linked companies accounting for nearly one third of this amount, said Moody’s.
Historically, the transition from potential to actual fallen angels has been quite low, but there have been some surges, the company noted.
For example, 2008 and 2009 saw the largest number of fallen angels, with nine companies downgraded to high-yield from investment-grade during that period, the company added.
If the number of actual fallen were to rise, high-yield bonds' refinancing needs would have the potential to crowd out lower-rated companies and in turn increase their refinancing costs, said Moody’s.
This scenario would drive credit differentiation, with refinancing risk for weaker and higher leverage companies likely to rise, Moody’s added.