How important is it that Ford regains its investment-grade credit rating, having been downgraded to junk in April? It’s “crazily important”, said Brian Schaaf, the chief financial officer of the carmaker’s financing arm, at a conference on Monday.
One day later, Molson Coors chief financial officer Tracey Joubert said that maintaining the beverage company’s investment grade rating was a priority, “not just for our bondholders, but for all stakeholders”.
There has always been good reason to aspire to being rated investment grade — the name given to the upper echelons of corporate credit ratings that rank companies’ creditworthiness on a scale from triple-A down. Bonds rated double B plus and below are known as high yield, or junk.
For large companies with a lot of debt — like Ford — it provides access to a far larger pool of investors, making it easier to manage a mammoth debt pile. The accreditation also typically means lower borrowing costs — although this is less stark in an era of such low interest rates.
After a year of unprecedented intervention in debt markets by central banks, there’s another reason, too: the implicit backing of the US Federal Reserve.
“For the first time, the Fed bailed out investment-grade rated companies,” says Hans Mikkelsen, an analyst at Bank of America. “As a company, you want that and the requirement for it is being rated investment-grade.”
The rating could play into company decisions on what to do with the piles of cash built up over the past year to outlast the drop in income from Covid-19, Mr Mikkelsen adds.
As the spread of coronavirus took hold in March, investors began dumping corporate bonds, prompting a sell-off across debt markets. In order to help soothe the market, the Fed stepped in, announcing for the first time that it would begin buying investment-grade rated corporate bonds. Even without the central bank purchasing a single bond, the market began to recover, assured by the Fed’s backing.
The floodgates opened to new issuance, with companies rushing to sell fresh bonds and build war chests of cash to help them make it through the crisis.
Even though Ford lost its investment-grade rating in April, its bonds made it on to the Fed’s permitted list to buy because the central bank included companies rated investment grade on March 22. The company has subsequently raised more than $15bn across four bond deals.
“Prior to the pandemic, we had a lot more conversations about is it worth what is required to retain investment-grade ratings, given the minimal penalty to borrowing costs,” says Stephen Philipson, head of fixed income and capital markets at US Bank. “But having looked into the abyss in March and seen what it feels like when liquidity leaves the market and the difference in access for investment-grade companies versus high-yield, no one is having that same conversation today.”
Now, with the possibility that the worst of the crisis is over, companies have to decide what to do with the cash piles built up over the course of this year. For the highest-rated companies, new acquisitions — even if they lead to more debt and a downgrade — could be on the cards, so long as they can remain investment grade. Others may favour rewarding equity investors by buying back stock.
But for the majority of companies, early signals are that they are focusing on paying down debt and improving cash flow.
“We're laser-focused on improving the business,” said John Lawler, Ford’s chief financial officer, early in November, adding, that as the company improves its profitability, it will work with rating agencies to move back to being investment grade.
Elsewhere, triple-B rated Anheuser-Busch InBev scrapped its dividend payment in October to prioritise reducing its mammoth $87.4bn debt pile.
This story has played out before, in Europe. In June 2016, the European Central Bank announced it would begin buying investment-grade corporate bonds. A marked increase in ratings upgrades followed, pushing more companies into the investment-grade class where their bonds would be eligible for purchase by the central bank, notes Mr Mikkelsen.
The Fed’s corporate bond purchases are expected to stop at the end of this year. But now that the threshold has been breached, the central bank could reintroduce the programme if economic conditions deteriorate again. Despite the prospect of Covid-19 vaccines and an improving corporate landscape ahead, companies are likely to want to ensure they have the central bank’s safety net beneath them.
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