While high yield improved its lot through the pandemic, some investment-grade issuers rated A or above took on more debt to maintain flexibility through the crisis. There wasn’t much reason not to increase debt, since interest costs would be only slightly higher if ratings were to fall to BBB. And as long as their ratings stayed within investment grade, companies would still have access to markets.
These crosscurrent movements, up and down, reinforce the critical role of deep and well-integrated research across the high-yield and investment-grade markets. Investors who can quickly recognize a credit poised to move will have an advantage over those who wait for official upgrades and downgrades.
Credit Markets Will Continue to Evolve
The pandemic has been destructive and disruptive. The key for investors is discerning the difference between permanent and temporary changes.
We think some pandemic-related changes, such as consumer shopping habits, may be more enduring than typical cyclical shifts. For example, mid-pandemic, the need to personally select tomatoes at the grocery store gave way to the convenience and safety of grocery delivery. Consumers also cut out the middleman on some products, buying directly from the maker. Higher direct-to-consumer sales on consumer products could mean lower distribution costs in the future.
Communications companies may benefit as workers require more internet bandwidth to work from home, at least part time, permanently. And as businesses increasingly adopt digitized processes, including customer and supply-chain interactions, tech companies are rising to meet the demand.
As credit markets rebound from overly pessimistic COVID-19 forecasts, there’s more shifting and changing under the surface than meets the eye. And we expect it will take some time for the dust to settle. While attention may focus on rising stars and fallen angels, investors who look beyond the obvious will realize the pandemic has created a credit universe full of potential stars-in-the-making.