As the Federal Reserve prepares for what most people think will be an interest rate hike this month, a ratings agency has issued a stark warning to bond investors.
S&P Global Ratings has said that nearly one in ten corporate debt issuers around the globe could be downgraded if credit spreads return to levels seen during the financial crisis.
This year corporate defaults reached levels not seen since the aftermath of the global financial crisis in 2009, so the notion of credit spreads widening across the entire corporate debt space is not beyond the realm of possibility.
However, S&P said that companies in North America and Europe would fare better than those in Latin America and Asia-Pacific.
In emerging markets, interest costs for the sample of rated issuers used by S&P would rise by at least one-third and cost corporate borrowers an additional $184 billion (€173 billion) annually.
“Globally, the sector most hurt in our stress scenario would be homebuilders, with about one in six issuers (16%) at risk of a downgrade,” said S&P credit analyst David Tesher.
“Other sectors in the worst quintile include metals and mining, transportation, forest and paper products, and retail and restaurants,” he added.
But S&P added that homebuilders’ vulnerability is concentrated in Asia-Pacific, where property markets have ridden high amid surging economic growth in the past decade.
In summary, Asia-Pacific and Latin American corporate issuers could be hardest hit, with 16% downgraded. These are followed by Europe, the Middle East, and Africa at 11%; and North America, 6%.
“We believe our findings imply that deeper debt markets would help borrowers to extend the distribution of maturities and would take pressure off the banking sector during times of crisis,” said Tesher.
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