Oracle Corp. and Stellantis NV are part of a growing list of high-grade companies whose bonds are now trading near junk levels, signaling a potential new wave of fallen angels in the bond market, per a report from Bloomberg. This development has raised concerns among investors and market analysts, who are closely monitoring the situation for signs of a broader trend.
According to data collected by Bloomberg, about $100 billion in US dollar and euro investment-grade debt is now trading with spreads wider than those typically seen in the junk bond market. This suggests a significant number of companies could soon see their credit ratings cut to non-investment-grade levels, which has major implications for both the borrowers and the funds invested in them.
Oracle and AI risks
Oracle has become the poster child for AI-related credit risks in the market. The company's aggressive investment in data centers and other AI infrastructure has pushed its bond spreads to levels that flirt with junk territory. Market participants are now debating how these heavy capital expenditures might impact Oracle’s long-term credit profile and whether the company can maintain its high-grade status.
Meanwhile, Stellantis has faced intense pressure from rising competition from Chinese automakers, who are producing vehicles at lower prices and higher volumes. This has led to declining sales and market share for Stellantis, turning it into the worst-performing European stock of the year, according to the source. The company's struggles highlight how even large, well-established firms can quickly fall out of favor in the global market.
Fund managers brace for more
Paul Benson, who leads systematic fixed income strategies at Insight Investment, believes we are now entering the late phase of the credit cycle. He points to softness in recent jobs data, a slowdown in consumer spending, and rising financing costs as contributing factors to this shift. These signs indicate that credit conditions are tightening, with more companies likely to face downgrades.
Benson manages a fallen angel fund, which automatically purchases bonds the moment a company is downgraded to junk status. He warns that AI-related risks are growing, especially for companies that have traditionally been viewed as stable and creditworthy. These businesses may now face unexpected challenges due to the fast pace of technological change and the uncertainty surrounding AI’s impact on business models.
Oracle’s bond spreads briefly moved into junk territory in July, but they have since returned to double-B levels by the beginning of August. This quick shift demonstrates how volatile markets can be in the face of macroeconomic changes and investor sentiment, sometimes without any official change in a company's credit rating.
Historic waves of downgrades
Past waves of fallen angel downgrades have typically followed major global market disruptions, such as the 2020 coronavirus pandemic and Russia’s 2022 invasion of Ukraine. When a company loses its high-grade status, it often triggers a chain reaction in the market. Investment funds that are only permitted to hold investment-grade debt are forced to sell the bonds, but the smaller junk market often lacks sufficient buyers, leading to sharp price declines.
Carla Taylor, a senior director at Fitch Ratings, explained that her firm evaluates cash flow, revenue, and profit margins to determine a company's creditworthiness over the long term. Even as companies may experience short-term stress, rating agencies are focused on how they will perform through an entire economic cycle, including periods of growth and recession.
Ashton Parker, a portfolio manager at Lombard Odier Investment Managers, described fallen angel strategies as contrarian, meaning they thrive when broader markets are struggling. He believes there may be opportunities in the chemicals sector, which has been struggling for years due to high energy costs and competition from China. He also warned that companies serving consumers are likely to feel more pressure from rising inflation, interest rates, and energy prices.
Market traders often respond faster than rating agencies, which can create discrepancies. A bond might trade at junk levels for a while without an actual downgrade being issued. This lag reflects the different timeframes that traders and credit analysts operate on, with the former reacting to current conditions and the latter taking a more long-term view.