Moody’s Downgrades Rise, Amid Towering Corporate Debt

Corporate America is looking at a rough patch ahead as earnings forecasts dip. But a bigger concern is the debt load that US companies carry. And the ongoing trend toward credit downgrades is not an inspiring signal.

So far in 2019, there have been 94 downgrades as opposed to 75 upgrades, for a ratio of 0.77, Moody’s data indicate. That ratio, wrote Mark Holman, CEO of TwentyFour Asset Management, a unit of Vontobel Asset Management, in a report, “is not an alarming figure, but it is becoming a trend.” Last year’s fourth quarter had a lot of downgrades and a 0.79 ratio.

At this stage, interest rate coverage remains solid. For US nonfinancial companies, earnings before interest and taxes cover almost four times interest expenses, a Federal Reserve study shows. Nevertheless, the level of corporate debt is daunting, totaling more than 70% of gross domestic product, higher than in 2007, right before the Great Recession.

A large amount of corporate issues now are rated as junk or near-junk. Consider coal miner Cloud Peak Energy, which Moody’s last month downgraded to Ca from Caa1. Both ratings are below investment grade, with the new one worse. Cloud Peak specializes in unearthing coal for the electric power industry. It figured that its mines in Wyoming and Montana would be a constant source of manna.

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The trouble is that public utilities are increasingly converting to clean natural gas. This has left Cloud Peak with a diminished customer base. A decade ago, coal made up half the fuel for power plants, and that has been cut to 25%.

Meanwhile, Bank of America continues its comeback from a near-demise due to the financial crisis. The banking giant was weighed down by its purchase of Countrywide, a large provider of sub-prime mortgages, which defaulted epically in the finance meltdown. Moody’s upgraded BofA to A2 from A3. Those ratings are upper-middle grade.

Which just goes to show that credit rating redemption is possible.

Weak 2016 Returns Spur Unfunded State Pension Liabilities

Credit Ratings and How to Beat Them

Tags: credit ratings, downgrades, Moody's

Wisconsin pension fund managers received bonuses totaling $9.8 million for 2018, which is 15% lower than the $11.6 million they received last year, and 30% below the $14 million they made in 2016, according to the State of Wisconsin Investment Board (SWIB).

The incentive compensation awards were based on a five-year investment performance that generated $224.5 million above benchmark returns after all costs for the fully funded Wisconsin Retirement System (WRS) Core Trust Fund. The 2018 awards are the lowest amount paid in the past five years, and represent only 2% of SWIB’s overall costs for managing $110 billion of assets.

SWIB has implemented a plan that targets total compensation at the median pay of an approved peer group set by an independent compensation consultant. It is earned for investment performance that exceeds benchmark returns for the previous five-year period that are set by the trustees with advice from an independent benchmark consultant.

“SWIB prides itself on its cost-effective internal management program because it provides significant financial benefit to the WRS,” David Stein, chair of the SWIB Board of Trustees, said in a release. “Having a market-based incentive compensation program allows SWIB to hire and retain top industry talent and dedicated experts needed to maintain the retirement system and manage investment risk.”

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SWIB beat both its five- and 10-year benchmarks on a gross and net basis for the Core Trust Fund as of Dec. 31, 2018. The five-year return gross of fees for the Core Trust Fund, the larger of the two WRS trust funds, was 5.2% as of the end of 2018, and the 10-year return gross of fees was 8.8%, beating the benchmark returns of 4.9% and 8.2% respectively, and well above the 7.0% assumed rate of return for the plan. For 2018, the fund lost 3.3%, ahead of its benchmark’s loss of 3.5% for the year.

The smaller variable fund matched its benchmark’s five-year return of 5.9%, and its 10-year return of 11.7% beat the benchmark’s return of 11.3% for the same period. However, the fund’s 2018 loss of 7.9% was slightly larger than the benchmark’s loss of 7.8% for the year.

SWIB says that because it places a greater reliance on internal management, it saves $75 million per year compared to what other public pension fund peers would pay to manage the same assets. SWIB claims that over the past 10 years, it has saved $410 million compared to similar funds in large part due to the use of internal investment staff.

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Tags: bonus, David Stein, incentive, SWIB, Wisconsin