Another A-Rating Goes Up In Smoke As "Fallen-As" Hit A Quarterly Record

Last Friday we noted that in the latest ominous development to hit the bond market, in addition to a potential deluge of "fallen angel" companies, or those which are currently rated the lowest investment grade rating, BBB, getting downgraded to junk, we have also witnessed accelerating downgrades of "pre-fallen angels", or "Fallen As": A-rated companies getting downgraded to BBB. And, as Goldman calculated as of December 14, quarter to date over $176 billion of debt has migrated into BBB territory from the A bucket the highest amount since 4Q2015, which was a period characterized by a heavy wave of commodity-related "fallen angels".

We can now add another: on Thursday, formerly A-rated tobacco giant Altria, which recently made two major acquisitions in the canabis space both of which were financed entirely with debt, lost its single-A ratings from S&P and Fitch and slumped into the BBBucket. Call it BBBtria?

Altria bonds widened 40-50bps across the curve since the initial headlines hit on Wednesday yesterday, as BofA notes.

Following the BBBtria cut, gross downgrade volume to BBB from single-A based solely on the Bloomberg Barclays index was $171.0bn in 2018 according to the following Bank of America table which shows the modest pace of downgrades through August and then the sudden pick up in "Fallen As" which starting in September, and which is set to continue into 2019.

Meanwhile, the net downgrade volume to BBB from single-A based on the ICE BofAML index has exploded to $114.9BN in 2018, up significantly from $0.7bn in 2017.

Finally, the most concerning chart is the following visual depiction from Goldman of all A -> BBB downgrades by quarter (not just members of the Bloomberg Barclays Index), which when incorporating Altria's downgrade which affects $11.5BN in debt, has surpassed the prior quarterly record hit during the peak of the commodity crisis hit in Q4 2015.

Naturally, as more BBB names pile up, it is only a matter of time before the next recession unleashes an avalanche of downgrades, only not from A to BBB but from BBB to junk, at which point one can say goodbye to the junk bond market for an extended period of time as the $1.2 trillion high yield bond market doubles on short notice, leading to a historic repricing (wider) in yields as the hundreds of billions of new junk participants have to be digested by the buyside.