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Everyone’s a rising star when debt is cheap

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It has never been easy to accurately assess credit risk. But it’s becoming even more difficult in an era of unprecedented government intervention and cheap money.

Credit risk and interest-rate risk are increasingly intertwined. Companies look better and more capable of repaying their debts simply because overall borrowing costs are so low.

In fact, cheap financing is a reason given by the credit-rating firms such as Moody’s Investors Service when they justify the potential creditworthiness of borrowers. This has contributed mightily to the record pace of credit-rating upgrades, with nearly twice as many upgrades of junk-rated companies compared with downgrades by S&P Global Ratings this year. That’s a reversal from last year, when more companies were lowered than raised up the credit scale.

Consider the $500 million offering of junk bonds from MicroStrategy Inc., with proceeds going toward buying Bitcoin. Putting aside the wisdom of buying these bonds or borrowing money to buy digital currencies, it was telling to see how Moody’s justified its Ba3 rating. In talking about MicroStrategy, the credit-rating company said that while........

© The Japan Times

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