There is likely to be a silver lining in Fitch’s downgrade of the US, at least for two companies — Microsoft Corp. and Johnson & Johnson.
(Bloomberg) — There is likely to be a silver lining in Fitch’s downgrade of the US, at least for two companies — Microsoft Corp. and Johnson & Johnson.
Citigroup Inc.’s head of global debt capital markets, Richard Zogheb, said the downgrade may actually benefit the small group of companies that have a credit rating as high or higher than the US. Investors could begin replacing sovereign bonds in their portfolios with the highly rated companies, as some did a few years ago during the European sovereign crisis, he said.
Moreover, the few companies that are rated on-par with the US could see their spreads tighten in line with US Treasury bonds.
“The bad news is it is a very small group of companies that have ratings at or above the current sovereign rate for the US government,” Zogheb said on Bloomberg Television Wednesday. “There is only so much of your portfolio that you can replace of sovereigns into these multinational, highly-rated areas.”
The move by Fitch Ratings to strip the nation of its top-tier rating on Tuesday will have little influence on the investment-grade corporate credit market, Zogheb added. The market has so far shown little concern to the change with companies, including Wells Fargo & Co., still choosing to sell debt Wednesday. And Zogheb expects it to remain that way, at least for the highly rated companies, with liquidity and optimism remaining strong.
“It is clearly a little hiccup,” Zogheb said on Bloomberg Markets Wednesday. “It clearly takes borrowing costs up, but there is so much liquidity out there. There is a real sense that markets continue to be attractive.
One area of concern, though, is around speculative grade companies that might not be able to meet the increased borrowing costs the downgrade is sure to bring. Many companies have already been struggling to cover the climbing interest and defaults have started to climb.
“If the government is not pristine, that will ripple through the entire corporate sector in the US,” Zogheb said. “This downgrade exacerbates the problem we already had.”
–With assistance from John McCorry.
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