How Companies Symbols were downgraded to “Junk bonds” Investment Category due to the Covid-19 pandemic

Companies Symbols in the sectors of aviation, retail, energy, automotive, etc., due to the Covid-19 pandemic have seen their productive and operational activities completely suspended or significantly restricted due to the quarantine imposed and the lockdown on economies and societies in general with aim the states and their societies equally to deal with the pandemic.

by T.C.

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Corporate bonds that were downgraded to «Junk Βonds»

Iconic global retailers such as Marks & Spencer, aviation companies such as Delta Airlines and energy companies such as Occidental Petroleum, have seen their issued bonds downgraded by international rating agencies and classified in the Junk Bonds investment category.

The less unfortunate companies saw their initial privileged position in terms of their borrowing capacity dematerialised and downgraded. Other companies are under constant monitoring of rating agencies e.g. companies such as General Motors, PSA, Volkswagen, Volvo etc.

The actions of the States against the spread of Covid-19 have contributed to all this. The rapid spread of the pandemic, the prolonged closure of shops, the drastic decline in sales, the sharp fall in demand for oil (for the oil price war please read the analysis titled “The Oil Price War and the Geostrategic Dimension that the Covid-19 Pandemic can cause in the Middle East“) and in general the gloomy outlook on their economic revenues have led to these seismic changes for all these sectors of the economy and for their representative symbols companies.

The direct reflection of the downgrade of these companies’ bonds is mirrored in the ever-higher interest payment that they must pay to their lenders.

This means that at the end of quarantine and lockdown all these affected companies will either be forced to lay off staff to reduce their operating costs, thereby covering increased interest payments on their part or to increase prices on their products. Without ruling out the implementation of both these corporate policies at the same time.

Until, however, economies return to normality and regularise their revenues and, more generally, the status on their cash flow from sales of their products will remain reduced.

The required liquidity injections

The International Air Transport Association (IATA) predicts losses for the aviation industry of about $252bn in 2020. The US Federal Government has already voted to allocate a fiscal liquidity package to all affected sectors of the US economy of $2trillion to get the largest percentage of American companies out of bankruptcy phase.

But this fiscal liquidity package is very small and perhaps at least one is the same as that must be voted and approved and since the lockdown on the economy will continue for more than 1.5 months.

On the other hand, the automotive industry worldwide was in the process of redefining and redirecting it towards electrification and autonomous driving and before it was hit by measures to tackle the Covid-19 pandemic. The car is the most consumable commodity in most countries of the world and demand for conventional thermal energy vehicles was already reduced.

If automakers are not financially supported by the governments of their states, then we will have a wave of massive staff redundancies and company mergers to create the necessary economies of scale that will enable them to deal with all these problems.

It is now a given that governments and generous liquidity packages to the affected companies and sectors of the economy respectively will judge in the future which companies will continue to operate and which will not.