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.