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Apocalypse soon? Impending fallen angels wave is too broad a brush


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Heightened market volatility and a string of credit-specific events (e.g., GE, PCG) have rendered investors increasingly concerned about surging credit risk in the BBB rated category of the investment grade corporate market. These fears have crystallized, almost counterintuitively, in an environment of recently accelerating EBITDA growth. Yet, the BBB rated segment experienced a 3% loss in 2018 -- its worst performance since the last crisis. The concern around the vulnerability of the approximately $2.5 trillion BBB rated corporate market to rating downgrades originates primarily from the brisk growth of this segment (in both absolute and relative terms). Rising leverage is also a source of investor anxiety, as record debt-funded M&A activity has resulted in a higher proportion of BBB credits’ leverage metrics mirroring BBs’. While much of the concern surrounding market size and leverage is understandable, a granular look at the data paints a more nuanced picture.

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