Worst Spate of Downgrades Since 2021 Signals Pain

(Bloomberg) — Credit rating downgrades are becoming more frequent, the latest sign that companies are starting to perform worse and raising fresh questions about whether corporate debt valuations should be as high as they are.

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In the second quarter, around $94 billion of high-grade US debt was downgraded, compared with just $78 billion of upgrades, according to JPMorgan Chase & Co. strategists. It was the first time since early 2021 that downgrades outpaced upgrades in dollar terms, and more companies are at risk of being demoted later this year as economic uncertainty rises, JPMorgan strategists including Eric Beinstein and Silvi Mantri wrote this week.

The economy faces unknowns now including whether trade wars will keep escalating. But corporate bond valuations are high, with US investment-grade spreads this week hovering around 0.8 percentage point, well below the two-decade average of around 1.5 percentage point. For junk securities, spreads are closer to about 2.8 percentage points, far short of the 4.9 percentage point average going back 20 years. That makes picking the right bonds crucial.

“Credit picking is super important now. You have to get your calls right,” said Jon Curran, head of investment grade credit at Principal Asset Management, in an interview. “The vulnerability to downgrades is higher.”

There are other reasons to be worried about credit quality now. High-yield borrowers are delaying about 9% of interest payments globally, known as paying in kind, according to JPMorgan Asset Management’s Oksana Aronov, up from about 4% in 2020. And cash balances at high-grade US companies are showing signs of starting to fall. The second quarter earnings season begins in the US in the coming week, and will give more insight as to how companies are faring.

Pacific Investment Management Co., overseeing $2 trillion, has been cautious in industries like retail that are facing long-term decline or those exposed to near-term risk of boosting borrowings, like metals and mining, homebuilders and autos, according to Sonali Pier, multi-sector credit portfolio manager at Pimco. She’s leaning into sectors likely to continue to benefiting from strong free cash flow and earnings growth trends, like banks and pipeline companies and more defensive sectors like healthcare, utilities and defense.

“We’ve maintained a light footprint in areas of the market where we foresee more downgrade and fallen angel risk,” said Pier.

Many investors are optimistic that company credit will generally remain strong. Overall US corporate yields remain high by the standards of the last decade. Portfolio managers in the US and Europe are selling default protection at an increasing pace, a signal they see little risk on the horizon. Their position on the main investment-grade US credit-default swap index now amounts to over $105 billion, the most in at least three years, based on data compiled by Barclays Plc and Bloomberg. It’s a similar story in Europe.

But by at least some measures, including not just ratings downgrades but also companies losing investment-grade status, the outlook is deteriorating. In the second quarter, there were about $34 billion of debt known as Fallen Angels, or bonds cut to junk, compared with just $3 billion of rising stars, JPMorgan strategists said. And on Friday, US President Donald Trump threatened a 35% tariff on some Canadian goods, ramping up his trade rhetoric.

“Businesses are vulnerable to tariffs but also living with uncertainty,” said Christina Padgett, head of leveraged finance and private credit research at Moody’s Ratings. “It’s not confirmed for a lot of businesses what their fate is.”

Week In Review

A pre-summer frenzy in junk loans is seeing the market start to overheat, prompting investors to get a bit more picky about deals after spreads reached the tightest levels in years.
Nissan Motor Co. raised $4.5 billion from a junk-bond sale in US dollar and euros, with the embattled automaker offering a record-high coupon on at least one part of the deal to drum up demand.
Japanese telecom giant NTT Inc. sold $17.7 billion of dollar and euro bonds, marking the biggest-ever offering by an Asian corporate in the global debt market.
Wall Street banks including JPMorgan Chase & Co. and UBS Group AG have begun early pricing discussions with investors for a $4.25 billion debt package to help finance Sycamore Partners’ buyout of UK pharmacy Boots.
Goldman Sachs Group Inc. and BBVA SA are among a group of lenders providing €500 million ($584 million) of debt to back Warburg Pincus’ buyout of a majority stake in Uvex Group.
A group of banks have beaten private credit lenders to arrange debt financing for French insurance broker Diot-Siaci, involving a loan of around €1.9 billion ($2.2 billion) as part of a capital reorganization.
In the US investment-grade bond market, Broadcom Inc. sold $6 billion of bonds in its biggest deal since 2021, while American Honda Finance Corp. priced $2.25 billion of bonds in its largest such sale.
Cruise operator Carnival Corp. sold $3 billion of seven-year high-yield bonds in the company’s fourth deal of 2025.
Banks from Wells Fargo & Co. to smaller Japanese lenders are flocking to top-rated collateralized loan obligation deals, pushing up secondary prices for buyout debt.
Cablevision Lightpath LLC, a fiber optic communications services provider that is majority controlled by Altice USA Inc., is looking to sell as much as $2.8 billion of asset-backed securities.
Saks Global Enterprises is negotiating terms of a previously announced debt plan with its creditors, as the retailer looks to increase support for a deal that will rearrange repayment priorities should the company fail to meet its obligations.
Genesis Healthcare Inc., one of the largest nursing home operators in the US, filed bankruptcy and struck an initial deal to be acquired by affiliates of ReGen Healthcare LLC.

On the Move

Nick Adragna has been tapped by JPMorgan Chase & Co. to lead the bank’s global investment-grade and macro credit-trading unit with co-head Pierre Morel set to retire.
Barclays Plc is hiring leveraged finance banker Alex Ranson from UBS Group AG as US head of leveraged finance capital markets. His move follows the addition of UBS alumnus Marc Warm earlier this year as the London-based bank seeks to build out its debt franchise.
Citigroup Inc. recruited Ryan Williams from Bank of Montreal to co-lead part of its leveraged-finance business, the latest move by its banking head to strengthen the firm’s focus on private equity clients.
Peter Yune, a director of high-yield trading at Bank of America, has resigned for a trading role at Deutsche Bank.
Performance Trust Capital Partners is hiring Liz Harper, formerly at Barclays Plc, as part of the broker-dealer’s effort to expand in fixed-income. Harper started earlier this month as a managing director with a focus on institutional investors in credit strategies across the US Midwest.
Banco Santander SA is hiring Phil Tamplin, formerly at Mizuho Securities, to join the bank’s leveraged finance team. Tamplin was previously a managing director for leveraged finance capital markets at Mizuho.
Revolut Ltd., Europe’s largest digital bank, hired Chris Rigby as head of capital markets for credit as it seeks to expand its presence in securitization markets. Until recently, Rigby was chief financial officer and chief investment officer at collapsed financial technology firm Stenn Technologies.