BBB-rated debt is proving surprisingly resistant to COVID-19

March 25, 2021

BBB-rated corporate bonds

U.S. corporate debt levels have surged

BBBs represent about half of the $6 trillion U.S. investment-grade credit market
The image shows that par value of debt outstanding increased for two categories of bonds shown, those rated BBB and those rated A and above. Both their amounts outstanding climbed from well below 1 trillion dollars each at the beginning of 2000 to about 3 trillion dollars at the end of 2020. The par value of bonds rated BBB has risen slightly faster than the par value of bonds rated A and above.
Factors mitigating downgrade risk for BBB-rated bonds
Leverage of U.S. BBB-rated issuers has eased significantly
 The image shows that the debt/EBITDA ratio has fluctuated since 2000 for high-, mid-, and low-rated BBB bonds. While it increased significantly in 2020 for all three categories, it has since fallen and is expected to continue declining through 2022.
BBB-rated bond issuers have stockpiled cash amid the pandemic
The image shows that cash and cash equivalents of U.S. issuers (excluding financials) rated BBB and those rated A and above together stood at about two hundred billion dollars in 2000. Since then, cash and cash equivalents for both categories of issuers have risen significantly, accelerating particularly in 2020.
Ratings agencies have largely taken a wait-and-see approach

U.S. recovery tracking ahead of Europe

Where Vanguard analysts see opportunities for active management

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