JPMorgan sees ‘early signs’ of stress on credit

DEMAND SHOCK AND SUPPLY-CHAIN DISRUPTIONS FROM THE VIRUS COULD ALREADY BE CAUSING PROBLEMS FOR BUSINESSES

SINGAPORE: The fallout from the global spread of coronavirus may be starting to affect credit and funding markets, according to JPMorgan Chase & Co.

Supply-chain disruptions and demand shock from the virus fallout could already be causing cash-flow problems for businesses, JPMorgan strategist Nikolaos Panigirtzoglou wrote in a note on Friday. That’s probably even more true for smaller companies and those in sectors like travel and lodging, he said.

“If these shifts in credit and funding markets are sustained over the coming weeks and months, especially in the issuance space, credit channels might start amplifying the economic fallout from the Covid-19 crisis,” Panigirtzoglou said. Unless “credit support by central banks and/or governments is broad, fast and direct, we note credit markets are facing an increased risk of the cycle turning with a lot more downgrades or even defaults over the coming months.”

Credit markets suffered their worst day in a decade on Friday amid fears that coronavirus will hurt corporate income and stymie some companies’ ability to repay their debt. Travel- and leisure-related companies were hit, while energy-company bonds and loans fell further into distress. A derivatives index that measures the perceived risk of corporate credit surged by the most since at least 2011 and in Europe the cost of insuring senior financial debt skyrocketed. Market concerns about ratings downgrades and companies dropping to junk status are justified by a look at credit fundamentals, the JPMorgan report said. The median netdebt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio for companies in JPMorgan’s high-grade and high-yield companies in the US and Europe has risen steeply in the past decade and is now higher than in the previous two cycles in 2007/2008 and 2001/2002, it said.

“Companies are currently much more vulnerable to a decline in incomes and/or a rise in corporate bond spreads and yields than in the previous two recessions,” Panigirtzoglou wrote. “This is especially true for US credit and for Euro high yield”.