US Corporate Bonds and Borrowers – Real Risks May Lurk in the B Category

The large proportion of US Corporate debt in BBB bonds has raised concerns in the financial press that any economic weakness could see a significant proportion of these downgraded to Non-investment Grade.  But bonds are only part of the Corporate debt picture; bank-sourced data shows the credit distribution of corporate borrowers that use bank financing, even if they are unrated by the main agencies and/or do not issue bonds.  The chart shows major differences in the credit distribution of bonds compared with S&P issuer ratings and bank ratings of their own borrowers.

Source: S&P, Bloomberg, Citigroup, Credit Benchmark

In particular:

  • There are high proportions of bonds in the A and BBB categories, and a relatively low proportion in the BB category.
  • Relative to bonds, borrowers from banks show a much higher proportion in bb (equivalent to BB) and a significant number in the b category.
  • S&P issuers have a very high proportion in the B category.  This group seems to be under-represented in the US Corporate bond and bank borrower distributions.

This suggests that many of the B rated issuers are self-funding, or use peer-to-peer borrowing, and have more limited access to bond issuance or bank borrowing.  Although the financial media has focused on BBB bonds, this data suggests that there is a large number of B-rated issuers that may be most at risk in any credit downturn.

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Credit Benchmark brings together internal credit risk views from over 40 leading global financial institutions. The contributions are anonymized, aggregated, and published in the form of consensus ratings and aggregate analytics to provide an independent, real-world perspective of credit risk. Risk and investment professionals at banks, insurance companies, asset managers and other financial firms use the data for insights into the unrated, monitoring and alerting within their portfolios, benchmarking, assessing and analyzing trends, and fulfilling regulatory requirements and capital.