Nissan downgrade seen as start of 'fallen angels' cycle

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Press day at the Los Angeles Auto Show
A Nissan logo is seen in a vehicle during the press day at the Los Angeles Auto Show in Los Angeles, California, U.S. November 17, 2022. REUTERS/Mike Blake

WASHINGTON, March 9 (Reuters) - The downgrade of Nissan Motor's (7201.T) credit rating from investment grade to junk by S&P Global on Tuesday marks the start of a cycle that could see as much as $55 billion of so-called "fallen angels" this year, said fund managers.

Global supply-chain disruptions, higher labor costs and persistently high inflation in a slowing economy is expected to hurt companies in cyclical sectors like automotives, homebuilding and industrials, leading to rating downgrades of some investment-grade rated companies.

S&P cut Nissan's rating by one notch to BB+ or junk, saying its profitability will remain weaker than global peers as softening demand for new car sales in the U.S. and Europe would pressure sales prices.

"We're now reaching that inflection point where you're going to start seeing that recession squeeze on companies' earnings," said Jason Friedman, global head of business development at Marathon Asset Management.

Nissan had $10 billion in outstanding U.S. dollar bonds, making it the largest fallen angel since 2020, said BofA Global Research in a report on Tuesday.

Fallen angel volume this year may not be as bad as 2020 when it touched $250 billion, but it could be significantly higher than $18 billion in 2022.

Some 0.8% of the investment-grade bond index, or $55 billion, was seen at risk for downgrades and already trading at the BB-rating band or junk bond levels, the report said.

Unlike energy in 2020, no sector is currently in distress and the Fed is expected to start cutting interest rates if the economy slows too much, said BofA Global.

Junk-bond fund managers see the downgrades as an opportunity to invest in quality companies that have the potential to graduate back to investment grade.

They could also buy them almost 150-200 basis points cheaper than an equivalent BB bond, as some funds may be forced to sell these bonds for failing to meet their investment-grade bond mandates, said Manuel Hayes, senior portfolio manager at asset manager Insight Investment.

Reporting by Matt Tracy, editing by Shankar Ramakrishnan and Hugh Lawson

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