NEW YORK (Reuters) – Stock market price movements have hit the headlines at the end of the year, but another important financial market, US investment grade corporate bonds, has its worst annual performance since the financial crisis a decade ago.
FILE PHOTO – A sign from General Electric (GE) will be seen during the China International Import Expo (CIIE) at the National Exhibition and Convention Center in Shanghai, November 6, 2018. REUTERS / Aly Song
General Electric Both companies had suffered co-securities ( GE.N ) as the 126-year-old conglomerate, founded by Thomas Edison, suffered huge losses and write-offs on assets.
GE's share slid 56 percent in 2018, the fourth largest decline in the S & P 500 Index .SPX. Although GE's $ 120 billion bonds have not fallen that much, securities, which have always been an integral part of bond managers around the world, are among the leaders in the major indices, the $ 6 trillion Dollar sector for corporate bonds with investment grade rating.
GE's bonds slumped by around 14 percent – a huge underperformance in the bond market. Analysts fear that this could signal worse times for investment grade credit. According to the Bank of America / Merrill Lynch Index, total revenue of the 2018 sector is negative at 2.5 percent, the largest decline since 2008.
US. According to the Securities Industry and Financial Markets Association, companies doubled their balance sheets at $ 9.1 trillion, almost twice as much as in 2007 ($ 4.9 trillion in total).
With the gradual tightening of Federal Reserve monetary policy, investors have rethought their commitment to these assets. Bonds from dozens of formerly high-quality issuers are already traded as if they no longer had an investment grade.
As interest rates rise, "the weaker links will be exposed," said Kathleen Gaffney, director of diversified fixed income securities at Eaton Vance.
Following the sharp slump in GE's shares this year, the debt burden is now about twice as high as its market capitalization of $ 63 billion.
MANY COMPANIES KEEP
GE's debts are not alone in the kennel.
Bonds from Ford Motor Co ( FN ), AT & T Corp. ( TN ), Children's Morgan ( KMI.N ), CVS Health ()
Bonds that are likely to be downgraded to junk ratings should be among the worst performers when the next economic downturn sets in, says Monica Erickson, portfolio manager for global developed credit at DoubleLine Capital LP.
She noted that around $ 3 trillion of triple-B bonds are outstanding, accounting for about half of the investment grade market, compared to only about 20 percent a decade ago.
"The $ 3 trillion Triple B market could make it difficult to find a buyer in the $ 1.2 trillion high yield market," she said. Many fund managers only need to hold investment grade debt in their portfolios, so they may be forced to sell at significant discounts if the debt is downgraded to junk.
Currently, the junk market is $ 1.2 trillion. If GE loses investment-grade status, these bonds alone would suddenly account for around 10 percent of the high-yield market.
Not all Triple B loans are downgraded in the event of a downturn. However, you are likely to have a larger percentage of this overall (investment grade) market shift into this high-yielding market than was the case in the past, "Erickson said.
HOW MUCH DO YOU LIKE?
GE's new Chief Executive Officer, Larry Culp, is struggling to recover profits and reduce debt after the company lost $ 22.8 billion in the last quarter, mainly due to its ailing powerhouse unit.
To support the money, it cut its once-rich quarterly dividend to just a penny a share, and Culp said GE will "urge" asset sales.
These efforts have so far been insufficient for bondholders and rating agencies.
In response to a request for comment, a GE spokesman cited Culp's statements in his third quarter earnings report and recent media interviews on debt reduction plans.
All three major bond investors have cut GE's credit rating twice in the past 13 months. It is now rated BBB + by BBB & BBB, with ratings from Moody's and Fitch.
GE's $ 43 billion worth of GE bonds are sold at less than 90 cents against the dollar, with more than $ 17.5 billion available for less than 80 cents. The lowest value, a $ 2 billion per annum bond sold in 2015, is currently around $ 63 in the dollar, up 17.5% from the 4.1% coupon.
For comparison: The average triple B bond yields 4.7 percent according to BAML index data.
The cost of hedging GE bonds against default is nearly the highest since the financial crisis. However, the biggest risk for bond investors is that they can not sell their holdings if the company's fundamentals deteriorate.
"You have many sellers and no buyers," said a GE debtor who did not want to be named for compliance reasons. And so "we have not yet sold our debt."
"You saw people moving toward the exit, and there is no buyer, and you have a big trade," said the investor. "Everyone gets questions from their boss or customer and asks," How much GE do you own?
Reporting by Kate Duguid; Editing by Dan Burns and David Gregorio