Get the latest market trends in your inbox
Stay on top of the latest market trends and economic insights with the Axios Markets newsletter. Sign up for free.
Catch up on coronavirus stories and special reports, curated by Mike Allen everyday
Catch up on coronavirus stories and special reports, curated by Mike Allen everyday
Denver news in your inbox
Catch up on the most important stories affecting your hometown with Axios Denver
Des Moines news in your inbox
Catch up on the most important stories affecting your hometown with Axios Des Moines
Minneapolis-St. Paul news in your inbox
Catch up on the most important stories affecting your hometown with Axios Minneapolis-St. Paul
Tampa-St. Petersburg news in your inbox
Catch up on the most important stories affecting your hometown with Axios Tampa-St. Petersburg
Illustration: Aïda Amer/Axios
Both Moody's and S&P Global downgraded PG&E from investment grade to junk this week, meaning the California utility is likely in for some major upheaval.
Why it matters: PG&E's problems are unique, but the company's recent trouble highlights a growing risk in the credit market for companies that technically have investment grade debt, but are teetering on the brink of junk status. A weakening economic and credit cycle could spark a slew of downgrades, with half of investment-grade debt in the lowest-rated rank.
- Driving the news: PG&E could face up to $30 billion in liability costs related to fires California wildfires. It has about $50 billion in outstanding liabilities vs. $71 billion in assets, and its shares have lost more than two-thirds of their market value since the most recent fires in Nov.
The number of companies with debt just one level above junk has swelled 247% since the end of 2007, faster than the 190% increase for the overall credit market. But so far, only 7% of these companies has been downgraded, according to Fitch Ratings.
- A downgrade would make it pricier for companies to tap into capital markets, which some rely on for growth and others just to keep things running. A downgrade to junk can also force fund managers who only hold investment grade debt to sell, and high-yield managers might not be interested until the price falls further.
The bottom line: Corporations have ratcheted up their debt load to the tune of $9 trillion since the financial crisis, thanks to easy money and a long period of low interest rates. S&P Global analysts noted recently that the booming credit cycle is "in its later stages."