Weekly Market Summary

Extra Credit^*

• When taking a step back and examining the long-term trends of credit-rating changes in investment-grade corporate bonds, an interesting pattern emerged in the 1990s, as the average credit rating of investment-grade issuers was quite high with only about a quarter of the index rated BBB. There was also significant issuance in the AA and even AAA category.
• But fast forward 30 years and by 2020, the proportion rated BBB had climbed to over 60%, as companies migrated en masse to the lowest ends of the investment-grade spectrum. In addition, ratings above A were increasingly rare: the proportion of AA rated securities fell by nearly half.
• So, what drives a company’s credit rating? Credit ratings are not algorithmically tied to leverage. Instead, they are primarily driven by the agencies' assessment of a company’s overall credit risk, as the stability of cash flows and access to financing both factor into this analysis. In other words, a credit rating is intended to be a sufficient statistic for credit risk. While that is not always true at a granular level, at a macro level it suggests that increased leverage associated with a rise in the level and stability of earnings should not result in a downwards trend in ratings.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished October at 1.54% for high-yield bonds and 0.34% for bank loans, up and down from 1.30% and 0.55% in the month prior. This is also well below the long-term historical default rate of 3% for loans and 3.4% for high yield, and the historical post-Global Financial Crisis default rates of 2.3% and 2.5%, respectively.

Sources: Bloomberg and JP Morgan as of 12/9/24.