Moody’s Investors Service cut its outlook on corporate debt to negative from stable despite the Federal Reserve’s unusual move to keep the market functioning during the coronavirus crisis.
The rating agency is expecting default rates to rise, with those sectors that are “most sensitive to consumer demand and sentiment” — including global passenger airlines, the lodging and cruise industries, and autos — being especially hard-hit due to social distancing.
Plunging energy prices will leave the oil and gas sector exposed, while banks also will face a challenging environment amid falling interest rates that eat into profitability and a deteriorating economy that will undermine credit quality, Moody’s said in a report.
As part of a package of programs aimed at stabilizing the markets, the Fed announced last week it would move for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds.
Moody’s said the central bank intervention will help, but some of the most heavily indebted sectors will still be vulnerable. “Government support will cushion the blow for some companies, but it is unlikely to prevent distress at businesses with less certain long-term viability,” Edmond DeForest, senior credit officer at Moody’s, wrote.
The Moody’s downgrade came as Yum Brands, the owner of fast food franchises KFC, Taco Bell and Pizza Hut, became the first junk-rated company to raise fresh capital from bond investors since the coronavirus brought issuance to a standstill in early March.
“Investors lapped up the deal on Monday, allowing the company to increase its size by $100 million to $600 million, as it looked to bolster its cash position in the face of a prolonged economic shutdown that has prevented many customers from eating out,” The Financial Times reported.
Moody’s found the deal hard to swallow, placing Yum’s debt on negative watch.
“They are increasing debt levels at a time when the company is facing significant uncertainty surrounding the potential length and severity of restaurant closures and the ultimate impact that these closures will have on Yum’s revenues, earnings and liquidity,” said Bill Fahy, a senior credit officer at Moody’s.
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