Originally Posted by Excargodog

I fully understand stable. The problem is that the economy is NOT stable, which makes B- worse than it usually would be and even BBB less good. BBB normally is “good” but as your own posting demonstrates “adverse business or economic conditions (which we have and are about to get worse) are more likely to impair this capacity.”

The historical reason that BBB is rated good is that it is the lowest “investment grade” which allows these bonds to be bought by mutual funds whose prospectus restricts them to investment grade.

Anything below that is technically a “junk” bond. Now with the Fed into quantitative easement, even companies rated B- (and stable) could get people to buy their bonds at par with a coupon of as little as 3.5%. and lines of credit at only a little more. That’s because the Fed was damn near GIVING money away.

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But those times are over.

The Fed has been making big interest rate hikes and is likely to raise interest rates by another 75 points shortly, looking to max out at 3.4% by year end.


https://www.nytimes.com/2022/07/25/b...-increase.html


Now generally speaking, carrying a lot of debt with inflation is not a bad thing. I’ve got a mortgage I COULD pay off but at 2.5% fixed I’d be crazy to do it. But if that were a variable rate mortgage, inflation could eat me alive. And that’s a situation very akin to what we are talking about here.

Companies holding junk bonds are in the same shape. As long as they can hold on to those old rates, they are fine, or at least no worse than they were before the rate increases. But bonds have a maturity date at which time you need to pay back ALL of the par value. If you don’t have the money to do that, you have to refinance and the loan you previously had at 3.5% is now going to cost you more - typically 5% more for B- (stable) companies and sometimes even more since the assets that collateralized those bonds are now five years older and used rather than new. And it’s even worse for lines of credit that count on the liquidity side of your ledger but may actually cost you 12% annually if you tap them. At the “old” rates AA is paying about $2 Billion annually for debt service. What do YOU think they’ll be paying at the rates they will refinance these bonds at by selling new bonds?

So yeah, laugh all you want and count keyboard coup because under normal economic conditions BBB is “good.”

But it doesn’t change reality one damn bit.