The Covid-19 pandemic has caused mayhem across global markets and challenged the balance sheets of some previously solid businesses.
Throughout the pandemic, government support has helped many businesses cope with the dramatic fall in revenue. Furlough schemes staved off mass redundancies and state-backed loans have propped up balance sheets. As these schemes wind down, how will the firms in the IG credit markets cope? Bond fund managers say while there might be some defaults or downgrades; it shouldn’t be a major concern as a result of the makeup of the market.
Banks account for 25% of global bond markets and they are being supported by policies to manage losses. Credit quality may move sideways but expect to see weaker banks merging with stronger ones.
Sectors where the outlook is as good, such as technology and food & beverage, make up 10% of the market. Largely unaffected sectors, such as utilities, telecoms and healthcare, add up to another 20% of the market.
Real estate, which is 4% of the market isn’t a homogenous sector as there are so many different sub-sectors. Warehouses and logistics have benefited from home delivery and the Amazon effect. For retail or offices, the outlook is more difficult, but this only accounts for 1% of the market.
In sectors where the pandemic has negatively affected operations and earnings, many IG-rated companies have significant levers they can use to react to that. A combination of cost-cutting, capex phasing, working capital management and inorganic activity such as asset sales, dividend cuts or equity raises can and will be utilised to defend balance sheet credit quality. IG ratings are based on a combination of strong market positions, diversified operations, and resilient balance sheets and this combination is what gives many IG companies the flexibility to adapt where required.