Barrick Gold Corp., Goldcorp Inc. and Yamana Gold Inc. are still considered investment grade, but only barely, and with negative outlooks for their credit quality, according to Moody’s.Carla Gottgens/Bloomberg
More companies were tossed into the investment junkyard during the first three months of this year than in all of 2015, as weak commodity prices helped to undermine once-solid corporate balance sheets.
Moody's Investors Service, one of the world's largest credit raters, said in a report that it pushed 51 companies out of its investment-grade category during the first quarter of 2016, a reflection of their increasing risk of default.
By comparison, Moody's downgraded only 45 companies to below investment-grade status during all of last year.
The surge in downgrades is a worrisome sign for a global economy that is still finding it difficult to generate robust growth seven years after the financial crisis ended.
Companies that have fallen from investment-grade respectability are known as fallen angels. An increasing number of such casualties suggests that credit quality is growing more fragile. Companies are becoming fallen angels at the fastest pace since the last crisis ended in 2009, raising concern that the current business cycle may be feeling its age.
"The pressure on commodity-linked industries and sovereign ratings were key drivers of the increased activity," Moody's said in explaining its recent downgrades.
For instance, 28 Brazilian companies became fallen angels after Moody's stripped the country's sovereign debt of its investment-grade status in February. South America's largest economy is in its worst downturn since the Depression. It faces a political crisis as President Dilma Rousseff battles calls for her impeachment.
Also feeling the heat are commodity producers. They endured a horrific 2015 as key prices for raw materials kept sinking to new lows. Twenty-two of the 51 newly fallen angels came from the energy and mining industries.
The debt of the companies that have been downgraded is now considered speculative grade. So-called junk bonds typically have to pay higher yields than investment-grade bonds to offset their higher probability of loss.
Despite the downgrades in the first quarter, some indicators suggest trends may be stabilizing.
Among them is the decreasing number of companies in what Moody's calls the crossover zone. The zone consists of investment-grade businesses that are close to being downgraded to junk status, or speculative-grade companies that may soon be boosted to investment grade.
Seventy-two financial companies were in the crossover zone at the end of March, two fewer than at the end of last year. The number of potential fallen angels decreased to 59 from 63, while potential rising stars – speculative-grade companies close to being raised to investment grade – bumped up to 13 from 11.
The crossover zone harbours several Canadian companies: Barrick Gold Corp., Goldcorp Inc. and Yamana Gold Inc. are still considered investment grade, but only barely, and with negative outlooks for their credit quality, according to Moody's.
In the energy sector, Canadian Natural Resources Ltd. and Repsol Oil & Gas Canada Inc. are in similar straits, as is methanol producer Methanex Corp.
On a more positive note, Progressive Waste Solutions Ltd. is a potential Canadian rising star.
Moody's said North America is home to 34 per cent of potential fallen angels but 61 per cent of potential rising stars. "Crossover zone membership remains high in 2016, and we expect the number of fallen angels to increase throughout the year," said Mark Stodden, a Moody's vice-president and senior credit officer.
Ian McGugan