Sep 2, 2020 - Economy & Business

A credit upgrade cycle may be coming

Illustration of a pattern of buckets of money with a giant hand picking up one bucket.

Illustration: Aïda Amer/Axios

U.S. companies have taken on a historic amount of debt this year, with investment grade corporates already issuing a record $1.5 trillion in bonds, more than any full-year total ever. But many have also upped their holdings of cash, making net debt burdens far lower than expected, data from Bank of America Securities shows.

Why it matters: Lower indebtedness means companies will have stronger balance sheets and better ratings. That could mean not only do fewer companies default on debt than expected, but it "ultimately should lead to an upgrade cycle" in credit ratings, BofA analysts say.

By the numbers: While investment grade industrial companies increased indebtedness by $397 billion in the first half of the year, they also grew cash holdings by $351 billion, meaning net debt rose by only $46 billion.

  • BofA credit strategist Hans Mikkelsen points out in a note that gross debt for IG non-financial non-utility issuers grew by 8.7% year over year, but was allocated heavily in cash and securities holdings.
  • Net debt actually declined by 4.8% (adjusting for the effect of ASC 842 accounting rule change).

The intrigue: "This is a dramatically better outcome for corporate balance sheets overall than what it looked like at the darkest hour," Mikkelsen said.

  • "Recall that economists and equity analysts lowered estimates so much that we have seen large beats both for economic data and corporate earnings for [the second quarter]."
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