The number of “fallen angels” – formerly creditworthy companies now deemed a risky prospect for lenders – could hit a record this year, with Marks & Spencer the latest UK firm to be given the unwanted “junk” status.
The credit rating agency S&P has stripped 24 companies of investment grade status so far in 2020 as the Covid-19 crisis bites, meaning they are now regarded as only speculative punts rather than high-grade investments.
The agency now considers a record 111 companies to be at risk of suffering the same fate, including British Airways, the fashion chain Next, Virgin Money and ITV.
Credit ratings are an assessment of how likely a company is to be able to repay its debts, providing bond investors with signals about whether to lend to them, and how much they should charge to do so.
Investment grade bonds are considered a decent prospect and carry a rating ranging from BBB- at the lower end of S&P’s scale all the way up to AAA for gold-plated companies considered to pose zero risk at all for lenders.
Anything below that, from BB+ down to D – for firms that are in default on their loans, is considered a speculative or junk bond. Bond investors are at greater risk of not getting their money back from such loans, so charge higher interest rates, making it more expensive for companies with a junk debt rating to borrow.
Marks & Spencer is one of the fallen angels likely to face higher borrowing costs after S&P cut its bonds to junk status on 26 March, leaving the retailer with a credit rating of BB+ on $2bn (£1.65bn) of debt.
At the time, the agency said it expected the coronavirus pandemic to result in significantly lower sales for M&S’s clothing and home divisions, which it did not believe could be fully offset by food and online sales. It also warned that the retailer’s rating could be cut further if the effect of the pandemic lingers on.
Other fallen angels from around the world include the carmakers Ford and Renault, Royal Caribbean Cruises and the US airline Delta.
S&P said the amount of debt owed by these firms had reached $300bn, the highest level since 2015 when the figure hit $1tn due to the travails of two giant state oil and gas firms, Russia’s Gazprom and Petrobras of Brazil.
A slew of UK firms have also been added to S&P’s list of companies at risk of a downgrade that would see them join the ranks of the fallen angels.
They include British Airways, which has said it could cut 12,000 jobs as part of a major restructuring effort aimed at saving costs, as airlines wrestle with the huge financial ramifications of a prolonged drop-off in air travel.
S&P also named ITV among its list of potential fallen angels, amid a slump in advertising revenues during lockdown.
Other UK firms to feature on the list of at-risk companies are the engineer GKN, Virgin Money, the B&Q owner Kingfisher and the industrial equipment rental firm Ashtead.
Financial institutions make up the majority of these firms globally, followed by leisure and hotels, with the oil and gas sector third on the list.
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