Credit Ratings and Credit Rating Agencies

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Corporate America Has Dodged the Damage of High Rates. For Now.

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Small businesses and risky borrowers face rising costs from the Federal Reserve’s moves, but the biggest companies have avoided taking a hit.The prediction was straightforward: A rapid rise in interest rates orchestrated by the Federal Reserve would confine consumer spending and corporate profits, sharply reducing hiring and cooling a red-hot economy.But it hasn’t worked out quite the way forecasters expected. Inflation has eased, but the biggest companies in the country have avoided the damage of higher interest rates. With earnings picking up again, companies continue to hire, giving the economy and the stock market a boost that few predicted when the Fed began raising interest rates nearly two years ago.There are two key reasons that big business has avoided the hammer of higher rates. In the same way that the average rate on existing household mortgages is still only 3.6 percent — reflecting the millions of owners who bought or refinanced homes at the low-cost terms that prevailed until early last year — leaders in corporate America locked in cheap funding in the bond market before rates began to rise.Also, as the Fed pushed rates above 5 percent, from near zero at the start of 2022, chief financial officers at those businesses began to shuffle surplus cash into investments that generated a higher level of interest income.The combination meant that net interest payments — the money owed on debt, less the income from interest-bearing investments — for American companies plunged to $136.8 billion by the end of September. It was a low not seen since the 1980s, data from the Bureau of Economic Analysis showed.That could soon change.While many small businesses and some risky corporate borrowers have already seen interest costs rise, the biggest companies will face a sharp rise in borrowing costs in the years ahead if interest rates don’t start to decline. That’s because a wave of debt is coming due in the corporate bond and loan markets over the next two years, and firms are likely to have to refinance that borrowing at higher rates.Overall Corporate Debt Interest Payments Have PlummetedAlthough the Fed has rapidly raised interest rates, net interest payments paid by corporations are reaching 40-year lows.

Note: Data consists of interest paid by private enterprises (minus interest income received) as well as rents and royalties paid by private enterprises.Source: Bureau of Economic AnalysisBy The New York TimesThe junk bond market faces a ‘refinancing wall.’Roughly a third of the $1.3 trillion of debt issued by companies in the so-called junk bond market, where the riskiest borrowers finance their operations, comes due in the next three years, according to research from Bank of America.The average “coupon,” or interest rate, on bonds sold by these borrowers is around 6 percent. But it would cost companies closer to 9 percent to borrow today, according to an index run by ICE Data Services.Credit analysts and investors acknowledge that they are uncertain whether the eventual damage will be containable or enough to exacerbate a downturn in the economy. The severity of the impact will largely depend on how long interest rates remain elevated.“I think the question that people who are really worrying about it are asking is: Will this be the straw that breaks the camel’s back?” said Jim Caron, a portfolio manager at Morgan Stanley. “Does this create the collapse?”The good news is that debts coming due by the end of 2024 in the junk bond market constitute only about 8 percent of the outstanding market, according to data compiled by Bloomberg. In essence, less than one-tenth of the collective debt pile needs to be refinanced imminently. But borrowers might feel higher borrowing costs sooner than that: Junk-rated companies typically try to refinance early so they aren’t reliant on investors for financing at the last minute. Either way, the longer rates remain elevated, the more companies will have to absorb higher interest costs.Among the firms most exposed to higher rates are “zombies” — those already unable to generate enough earnings to cover their interest payments. These companies were able to limp along when rates were low, but higher rates could push them into insolvency.Even if the challenge is managed, it can have tangible effects on growth and employment, said Atsi Sheth, managing director of credit strategy at Moody’s.“If we say that the cost of their borrowing to do those things is now a little bit higher than it was two years ago,” Ms. Sheth said, more corporate leaders could decide: “Maybe I’ll hire less people. Maybe I won’t set up that factory. Maybe I’ll cut production by 10 percent. I might close down a factory. I might fire people.”Small businesses have a different set of problems.Some of this potential effect is already evident elsewhere, among the vast majority of companies that do not fund themselves through the machinations of selling bonds or loans to investors in corporate credit markets. These companies — the small, private enterprises that are responsible for roughly half the private-sector employment in the country — are already having to pay much more for debt.They fund their operations using cash from sales, business credit cards and private loans — all of which are generally more expensive options for financing payrolls and operations. Small and medium-size companies with good credit ratings were paying 4 percent for a line of credit from their bankers a couple of years ago, according to the National Federation of Independent Business, a trade group. Now, they’re paying 10 percent interest on short-term loans.Hiring within these firms has slowed, and their credit card balances are higher than they were before the pandemic, even as spending has slowed.“This suggests to us that more small businesses are not paying the full balance and are using credit cards as a source of financing,” analysts at Bank of America said, adding that it points to “financial stress for certain firms,” though it is not yet a widespread problem.Corporate buyouts are also being tested.Carvana renegotiated its debt this year to defer mounting interest costs.Caroline Brehman/EPA, via ShutterstockIn addition to small businesses, some vulnerable privately held companies that do have access to corporate credit markets are already grappling with higher interest costs. Backed by private-equity investors, who typically buy out businesses and load them with debt to extract financial profits, these companies borrow in the leveraged loan market, where borrowing typically comes with a floating interest rate that rises and falls broadly in line with the Fed’s adjustments.Moody’s maintains a list of companies rated B3 negative and below, a very low credit rating reserved for companies in financial distress. Almost 80 percent of the companies on this list are private-equity-backed leveraged buyouts.Some of these borrowers have sought creative ways to extend the terms of their debt, or to avoid paying interest until the economic climate brightens.The used-car seller Carvana — backed by the private-equity giant Apollo Global Management — renegotiated its debt this year to do just that, allowing its management to cut losses in the third quarter, not including the mounting interest costs that it is deferring.Leaders of at-risk companies will be hoping that a serene mix of economic news is on the horizon — with inflation fading substantially as overall economic growth holds steady, allowing Fed officials to end the rate-increase cycle or even cut rates slightly.Some recent research provides a bit of that hope.In September, staff economists at the Federal Reserve Bank of Chicago published a model forecast indicating that “inflation will return to near the Fed’s target by mid-2024” without a major economic contraction. If that comes to pass, lower interest rates for companies in need of fresh funds could be coming to the rescue much sooner than previously expected.Few, at this point, see that as a guarantee, including Ms. Sheth at Moody’s.“Companies had a lot of things going for them that may be running out next year,” she said.Emily Flitter More

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    White House Hits Back on Fitch Credit Downgrade, Protecting Biden

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    The president’s team has mobilized to counter the downgrade of Treasury debt by the Fitch Ratings agency, rushing to defend the story of an improving economic outlook.When the Fitch Ratings agency announced this week that it was downgrading its long-term credit rating of the United States from AAA to AA+, Biden administration officials were ready — and angry.Administration officials had been lobbying Fitch against the downgrade, which bewildered many economists but became immediate fodder for congressional Republicans and nonpartisan budget hawks to criticize the nation’s current fiscal direction.When the ratings agency went through with the move anyway, President Biden’s team mobilized a rapid response, with economic heavyweights inside and outside the administration criticizing the timing and substance of the announcement.The swift pushback was an effort to keep the downgrade from tarnishing Mr. Biden’s economic record amid a run of good news in key measures of the health of the American economy. And its aggressiveness reflected the critical importance of an improving economic outlook to Mr. Biden’s re-election campaign.“What was important to the president was to point out not only was the Fitch decision arbitrary and outdated, but his administration has taken action to accomplish things that go in the exact opposite of the markdown,” Jared Bernstein, the chairman of the White House Council of Economic Advisers, said in an interview, citing a bipartisan deal to raise the debt limit and modestly reduce federal spending.“One reason why we punched back hard is because Fitch completely ignored accomplishments under this president, both on fiscal policy and on economic growth,” he said.The White House got lucky in one respect. Coverage of the downgrade was immediately swamped by the third criminal indictment of former President Donald J. Trump.It was an extension of a trend that has both helped and hurt Mr. Biden so far this year: Over the past six months, according to a Stanford University database, television networks have focused as much on news about his predecessor as on news about Mr. Biden.Also helping Mr. Biden was that investors largely shrugged off the Fitch Ratings move. Researchers at Goldman Sachs wrote on Wednesday that “the downgrade should have little direct impact on financial markets.”The downgrade came just after 5 p.m. on Tuesday. Fitch released a statement that attributed the move to “the expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance” in the United States over the past two decades.Most notably, Fitch officials cited a series of high-stakes showdowns over raising the nation’s borrowing limit. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” they wrote.The agency also expressed concerns over the rising costs of Medicare and Social Security benefits as more Americans retire, which are predicted to be the largest drivers of rising federal debt in the decade to come. Fitch predicted that the nation was headed for a mild recession by the end of the year. It was the second credit downgrade in American history, both directly linked to debt limit fights.Moments after the release, Biden administration officials hit back.Janet L. Yellen, the Treasury secretary, said in a statement that she strongly disagreed with a ratings change that she called “arbitrary and based on outdated data.”Soon after, administration officials organized a call with reporters to criticize the move in more detail. They questioned why Fitch had not downgraded the rating when Mr. Trump was president, based on Fitch’s own ratings models, and why it had done so now, soon after a compromise with Republicans in Congress that had averted a fiscal crisis.They rejected the agency’s recession prediction, citing strong recent economic data. They said the president was committed to further spending cuts — along with tax increases on corporations and the wealthy — to further reduce budget deficits in the future.Officials also pointed reporters to a range of outside economists and analysts who criticized the decision.Republicans quickly used the downgrade to criticize Mr. Biden.“With annual deficits projected to double and interest costs expected to triple in just 10 years, our nation’s financial health is rapidly deteriorating and our debt trajectory is completely unsustainable,” said Representative Jodey C. Arrington of Texas, the chairman of the House Budget Committee. “This is a wake-up call to get our fiscal house in order before it’s too late.”Fiscal hawks have been warning for more than a decade that America’s debt could grow unsustainable. Those calls grew as lawmakers borrowed trillions to help people, businesses and governments endure the Covid-19 pandemic. The cost of federal borrowing rose sharply over the past year as the Federal Reserve raised interest rates to combat inflation. More

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    Fitch’s Debt Downgrade Is Unlikely to Deter Borrowing, Investors Say

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    Fitch’s credit-rating decision stemmed from concerns about America’s ability to govern itself, along with the nation’s growing debt load.The downgrade of the United States’ debt by a major ratings firm is a damning indictment of the country’s fractious politics and a blot on its financial record that is unlikely to be quickly erased. But many investors and analysts say it won’t affect the government’s ability to keep borrowing money.On Tuesday, Fitch Ratings lowered the credit rating of the United States one notch to AA+ from a pristine AAA. The firm, citing a “deterioration in governance” along with America’s mounting debt load, suggested that it could be a long time before that decision was reversed.“Our base case is that deficits will remain high and the debt burden will continue to rise,” said Richard Francis, co-head of the Americas sovereign group at Fitch and its primary analyst for the United States, in an interview on Wednesday. “I think it is unlikely that there will be any meaningful changes.”The move — like the drop to AA+ in 2011 by S&P Global, which has kept its U.S. rating there — followed partisan brinkmanship over America’s debt ceiling, which caps how much money the government can borrow. The United States came within days of defaulting on its debt this spring as Republican lawmakers refused to lift the cap unless President Biden made concessions on spending. The two sides ultimately reached an agreement on May 27, just days before the Treasury Department projected that the government could run out of cash.With both Fitch and S&P now carrying a lower assessment, the United States’ credit rating, at least for most investors, will no longer be considered among the top tier, which includes Germany, Australia and Singapore.While the move is something of a black eye, market watchers expect the practical impact to be small. Analysts at Wells Fargo noted that the early feedback from their clients was that their appetite to keep lending to the government wasn’t likely to change much.That’s because the U.S. Treasury market is the largest sovereign debt market in the world, underpinning borrowing costs across the globe, with Treasuries owned by investors of all stripes. The U.S. rating remains among the highest in the world, backed by a strong and diverse economy and aided by the central global role of the country’s currency.“This is largely a symbolic move,” said Peter Tchir, head of macro strategy at Academy Securities.Stock markets slumped on Wednesday, and the yield on Treasuries — which indicates how much investors are demanding to be paid in exchange for lending to the government — rose. But analysts suggested that had more to do with rising government borrowing forecasts, resulting in higher interest rates and pointing to increased costs for companies, too.Fitch downgraded America’s debt on the day that former President Donald J. Trump was indicted on charges related to his efforts to overturn the 2020 election, which culminated in an attack on the Capitol on Jan. 6, 2021. The attack showcased deep distrust in the government and the rule of law.Despite the suspension of the debt limit in June, future fiscal fights — including a possible government shutdown this fall — are looming. The lack of comity between the political parties means the cap is likely to remain a political tool, with no guarantee that a compromise will always be reached.That increased polarization was central to Fitch’s decision. Mr. Francis said intense partisanship had inhibited decisions on better budgeting and the debt ceiling, with both Democrats and Republicans unmovable on policies that could improve the country’s fiscal position. These include, he added, changes to taxes, military spending, and Social Security and Medicare, which are expected to face ballooning costs as more baby boomers retire.“There is no willingness on any side to really tackle the underlying challenges,” Mr. Francis said.The ratings agency also cited the Jan. 6 attack as a concern that fed into the downgrade.“There’s the debt ceiling standoff, there is this painful budgeting process, there is political polarization that is ongoing and probably deteriorating — and then there is the Jan. 6 insurrection, but that is one factor among many,” Mr. Francis said.The Federal Reserve’s rapid interest rate increases have compounded some of those factors by raising borrowing costs, forcing the government to borrow even more money to account for higher interest and other payments to bondholders.On Wednesday, the Treasury Department detailed its plans to borrow over $1 trillion for the third quarter, which runs from July through September. The estimate, announced on Monday, is $274 billion more than the Treasury had forecast in May. The United States current debt is $32.5 trillion.More borrowing means more debt for investors to digest. A larger supply of Treasuries while investor demand stays the same, or even shrinks, means higher borrowing costs for the government. The 10-year Treasury yield rose 0.07 percentage points on Wednesday to 4.09 percent, its highest level since November.Treasury Secretary Janet L. Yellen continued to criticize the Fitch decision on Wednesday, describing it as “puzzling” and “entirely unwarranted.”“Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years,” Ms. Yellen said during an event in Virginia.Still, there does not seem to be any movement toward one solution that Fitch and many analysts have said would help the United States return to its higher rating: getting rid of the debt ceiling.Mr. Francis said it would “probably be helpful” to get rid of the debt limit if the United States ever wanted to regain a higher rating. Despite Mr. Biden’s desire to alter the process, there has been no indication that any changes are coming soon.Instead, Republicans and Democrats returned to the kind of partisan bickering that helped fuel the downgrade, with each side blaming the other for it.“The downgrade comes just months after Biden and congressional Democrats took the country to the brink of default and amid an increasingly unsteady economic path,” said Jake Schneider, director of rapid response for the Republican National Committee.The Democratic National Committee blamed the tax cuts and spending policies that were initiated by Republicans and Mr. Trump when he was president, saying the downgrade was “a direct result of Donald Trump and MAGA Republicans’ extreme and reckless agenda.” More

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    U.S. Credit Rating Is Downgraded by Fitch

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    The ratings agency, which lowered the U.S. long-term rating from its top mark, said debt-limit standoffs had eroded confidence in the nation’s fiscal management.The long-term credit rating of the United States was downgraded on Tuesday by the Fitch Ratings agency, which said the nation’s high and growing debt burden and penchant for brinkmanship over America’s authority to borrow money had eroded confidence in its fiscal management.Fitch lowered the U.S. long-term rating to AA+ from its top mark of AAA. The downgrade — the second in America’s history — came two months after the United States narrowly avoided defaulting on its debt. Lawmakers spent weeks negotiating over whether the United States, which ran up against a cap on its ability to borrow money on Jan. 19, should be allowed to take on more debt to pay its bills. The standoff threatened to tip the United States into default until Congress reached a last-minute agreement in May to suspend the nation’s debt ceiling, which allowed the United States to keep borrowing money.Despite that agreement, the federal government now faces the prospect of a shutdown this fall, as lawmakers spar over how, where and what level of federal funds should be spent. The nonstop dueling over federal spending was a major factor in Fitch’s decision to downgrade America’s debt.“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in a statement. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”Fitch pointed to the growing levels of U.S. debt in recent years as lawmakers passed new tax cuts and spending initiatives. The firm noted that the U.S. had made only “limited progress” in tackling challenges related to the rising costs of programs such as Social Security and Medicare, whose costs are expected to soar as the U.S. population ages.Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the U.S. credit rating amid a debt-limit standoff — the first time the United States was removed from a list of risk-free borrowers.By one common measure, Fitch’s move downgrades America’s credit rating not only under the rating agency’s own assessment, but also for the blended rating of the three largest agencies.At the margin, the move by Fitch could limit the number of investors able to buy U.S. government debt, analysts have warned. Some investors are bound by constraints on the quality of the debt they can buy, and those that require a pristine credit rating across the three major agencies will now need to look elsewhere to fulfill investment mandates.That could nudge up the cost of the government’s borrowing at a time when interest rates are already at a 22-year high. Most analysts, however, doubt that the impact will be severe given the sheer size of the Treasury market and the ongoing demand from investors for U.S. Treasury securities.Still, the downgrade is a blemish on the nation’s record of fiscal management. The Biden administration on Tuesday offered a forceful rebuttal of the Fitch decision — criticizing its methodology and arguing that the downgrade did not reflect the health of the U.S. economy.“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong,” Treasury Secretary Janet L. Yellen said in a statement.Ms. Yellen described the change as “arbitrary” and noted that Fitch’s ratings model showed U.S. governance deteriorating from 2018 to 2020 but that it did not make changes to the U.S. rating until now.Biden administration officials, speaking on the condition of anonymity, said that they had been briefed by Fitch ahead of the downgrade and made their disagreements known. They noted that Fitch representatives repeatedly brought up the Jan. 6, 2021, insurrection as an area of concern about U.S. governance.The downgrade came on the same day that former President Donald J. Trump was indicted in connection with his widespread efforts to overturn the 2020 election, which fueled the Jan. 6 riot.Senator Chuck Schumer of New York, the majority leader, said the Fitch downgrade was the fault of Republicans, who refused to raise America’s borrowing cap without steep concessions. He urged them to stop using the debt limit for political leverage.“The downgrade by Fitch shows that House Republicans’ reckless brinkmanship and flirtation with default has negative consequences for the country,” Mr. Schumer said.The debt limit agreement reached in June cuts federal spending by $1.5 trillion over a decade, in part by freezing some funding that was projected to increase next year and capping spending to 1 percent growth in 2025.Lawmakers and the White House avoided making big cuts to politically sensitive — and expensive — initiatives, including retirement programs. Even with the spending curbs the national debt — which is over $32 trillion — is poised to top $50 trillion by the end of the decade.It is unlikely that the downgrade by Fitch will convince lawmakers to drastically change the fiscal trajectory of the United States.“Instead of effectuating change, or fiscal discipline, our base case expectation is that Fitch will be pilloried by most members of Congress,” said Henrietta Treyz, director of macroeconomic policy research at Veda Partners. “It will not yield either deficit reduction, tax increases, reductions in military spending, entitlement reform or a change to the 12 appropriations bills that have already moved with substantial bipartisan support in the U.S. Senate.” More

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    Debt Ceiling Crisis: How a Default Could Unfold

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    Here’s a look at what markets are expecting and planning for, and how a default might happen.The United States is inching closer to calamity, as lawmakers continue to spar over what it will take to raise the country’s $31.4 trillion debt limit.That has raised questions about what will happen if the United States does not raise its borrowing cap in time to avoid defaulting on its debt, along with how key players are preparing for that scenario and what would actually happen should the Treasury Department fail to repay its lenders.Such a situation would be unprecedented, so it’s difficult to say with certainty how it would play out. But it’s not the first time investors and policymakers have had to contemplate “what if?” and they’ve been busy updating their plans for how they think things may play out this time.While negotiators appear to be moving toward an agreement, time is short. There is no certainty that the debt limit will be lifted before June 5, when the Treasury now estimates the government will run out of cash to pay all of its bills on time, a moment known as the “X-date.”“We’ve got to be in the closing hours because of the timeline,” said Representative Patrick McHenry, a North Carolina Republican who is involved in the talks. “I don’t know if it’s in the next day or two or three, but it’s got to come together.”Big questions remain, including what could happen in the markets, how the government is planning for default and what happens if the United States runs out of cash. Here’s a look at how things could unfold.Before the X-DateFinancial markets have become more jittery as the United States moves closer to the X-date. While exuberance over the profit-boosting expectations of artificial intelligence has helped the stock market recover, fears about the debt limit persist. On Friday, the S&P 500 rose 1.3 percent, a modest gain of 0.3 percent for the week.This week, Fitch Ratings said it was placing the nation’s top AAA credit rating on review for a possible downgrade. DBRS Morningstar, another rating firm, did the same on Thursday.For now, the Treasury is still selling debt and making payments to its lenders.That has helped mollify some concerns that the Treasury won’t be able to repay debt coming due in full, as opposed to just an interest payment. That’s because the government has a regular schedule of new Treasury auctions where it sells bonds to raise fresh cash. The auctions are scheduled in a way so that the Treasury receives its new borrowed cash at the same time that it pays off its old debts.That allows the Treasury to avoid adding much to its outstanding $31.4 trillion debt load — something it can’t do right now since it enacted extraordinary measures after coming within a whisker of the debt limit on Jan. 19. And it should give the Treasury the cash it needs to avoid any disruption to payments, at least for now.This week, for example, the government sold two-year, five-year and seven-year bonds. However, that debt doesn’t “settle” — meaning the cash is delivered to the Treasury and the securities delivered to the buyers at the auction — until May 31, coinciding with three other securities coming due.More precisely, the new cash being borrowed is slightly larger than the amount coming due, with the tricky act of balancing all of the money coming in and out pointing to the Treasury’s challenge in the days and weeks ahead.When all the payments are tallied, the government ends up with a little over $20 billion of extra cash, according TD Securities.Some of that could go to the $12 billion of interest payments that the Treasury also has to pay that day. But as time goes on, and the debt limit becomes harder to avoid, the Treasury may have to postpone any incremental fund-raising, as it did during the debt limit standoff in 2015.After the X-Date, Before DefaultThe U.S. Treasury pays its debts through a federal payments system called Fedwire. Big banks hold accounts at Fedwire, and the Treasury credits those accounts with payments on its debt. These banks then pass the payments through the market’s plumbing and via clearing houses, like the Fixed Income Clearing Corporation, with the cash eventually landing in the accounts of holders from domestic retirees to foreign central banks.The Treasury could try to push off default by extending the maturity of debt coming due. Because of the way Fedwire is set up, in the unlikely event that the Treasury chooses to push out the maturity of its debt it will need to do so before 10 p.m. at the latest on the day before the debt matures, according to contingency plans laid out by the trade group Securities Industry and Financial Markets Association, or SIFMA. The group expects that if this is done, the maturity will be extended for only one day at a time.Investors are more nervous that should the government exhaust its available cash, it could miss an interest payment on its other debt. The first big test of that will come on June 15, when interest payments on notes and bonds with an original maturity of more than a year come due.Moody’s, the rating agency, has said it is most concerned about June 15 as the possible day the government could default. However, it may be helped by corporate taxes flowing into its coffers next month.The Treasury can’t delay an interest payment without default, according to SIFMA, but it could notify Fedwire by 7:30 a.m. that the payment will not be ready for the morning. It would then have until 4:30 p.m. to make the payment and avoid default.If a default is feared, SIFMA — alongside representatives from Fedwire, the banks and other industry players — has plans in place to convene up to two calls the day before a default could occur and three further calls on the day a payment is due, with each call following a similar script to update, assess and plan for what could unfold.“On the settlement, infrastructure and plumbing, I think we have a good idea of what could happen,” said Rob Toomey, head of capital markets at SIFMA. “It’s about the best we can do. When it comes to the long-term consequences, we don’t know. What we are trying to do is minimize disruption in what will be a disruptive situation.”Default and BeyondOne big question is how the United States will determine if it has actually defaulted on its debt.There are two main ways the Treasury could default: missing an interest payment on its debt, or not repaying its borrowings when the full amount becomes due.That has prompted speculation that the Treasury Department could prioritize payments to bondholders ahead of other bills. If bondholders are paid but others are not, ratings agencies are likely to rule that the United States has dodged default.But Treasury Secretary Janet L. Yellen has suggested that any missed payment will essentially amount to a default.Shai Akabas, director of economic policy at the Bipartisan Policy Center, said an early warning sign that a default was coming could arrive in the form of a failed Treasury auction. The Treasury Department will also be closely tracking its expenditures and incoming tax revenue to forecast when a missed payment could happen.At that point, Mr. Akabas said, Ms. Yellen is likely to issue a warning with the specific timing of when she predicts the United States will not be able to make all of its payments on time and announce the contingency plans she intends to pursue.For investors, they will also receive updates through industry groups tracking the key deadlines for the Treasury to notify Fedwire that it will not make a scheduled payment.A default would then set off a cascade of potential problems.Rating firms have said a missed payment would merit a downgrade of America’s debt — and Moody’s has said it will not restore its Aaa rating until the debt ceiling was no longer subject to political brinkmanship.International leaders have questioned whether the world should continue to tolerate repeated debt-ceiling crises given the integral role the United States plays in the global economy. Central bankers, politicians and economists have warned that a default would most likely tip America into a recession, leading to waves of second order effects from corporate bankruptcies to rising unemployment.But those are just some of the risks known to be lurking.“All of this is uncharted waters,” Mr. Akabas said. “There’s no playbook to go by.”Luke Broadwater More

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    A Timeline of How the Banking Crisis Has Unfolded

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    First Republic’s downfall was just the latest in a series of problems affecting midsize banks.First Republic Bank was seized by regulators and sold to JPMorgan Chase on Monday, the latest casualty of a banking crisis that has seen other troubled lenders collapse in March.Silicon Valley Bank, one of the most prominent lenders to technology start-ups and venture capital firms, was the first to implode on March 10. Regulators seized Silicon Valley Bank, and later, Signature Bank, a New York financial institution with a large real estate lending business. The panic also led to Wall Street’s biggest banks stepping in to give $30 billion to First Republic and UBS’s takeover of its rival, the Swiss bank Credit Suisse.As investors and bank customers have fretted over the stability of the financial system, federal officials have tried to ease concerns, taking steps to protect depositors and reassuring them they could access all their money.Here is a timeline of events related to the global financial turmoil.March 8In a letter to stakeholders, Silicon Valley Bank said it needed to shore up its finances, announcing a roughly $1.8 billion loss and a plan to raise $2.25 billion in capital to handle increasing withdrawal requests amid a dim economic environment for tech companies.Moody’s, a credit ratings firm, downgraded the bank’s bonds rating.Silvergate, a California-based bank that made loans to cryptocurrency companies, separately announced that it would cease operations and liquidate its assets after suffering heavy losses.March 9Gregory Becker, the chief executive of Silicon Valley Bank, urged venture capital firms to remain calm on a conference call. But panic spread on social media and some investors advised companies to move their money away from the bank.A Silicon Valley Bank executive wrote in a note to clients that it had “been a tough day” but the bank was “actually quite sound, and it’s disappointing to see so many smart investors tweet otherwise.”The bank’s stock plummeted 60 percent and clients pulled out about $40 billion of their money.March 10In the biggest bank failure since the 2008 financial crisis, Silicon Valley Bank collapsed after a run on deposits. The Federal Deposit Insurance Corporation announced that it would take over the 40-year-old institution.Investors began to dump stocks of the bank’s peers, including First Republic, Signature Bank and Western Alliance, which had similar investment portfolios. The nation’s largest banks were more insulated from the fallout, with shares of JPMorgan, Wells Fargo and Citigroup generally flat.Treasury Secretary Janet L. Yellen reassured investors that the banking system was resilient, expressing “full confidence in banking regulators.”Signature Bank, a 24-year-old institution that provided lending services for real estate companies and law firms, saw a torrent of deposits leaving its coffers after customers began panicking.March 12New York regulators shut down Signature Bank, just two days after Silicon Valley Bank failed, over concerns that keeping the bank open could threaten the stability of the financial system. Signature was one of the few banks that had recently opened its doors to cryptocurrency deposits.The Federal Reserve, the Treasury Department and the F.D.I.C. announced that “depositors will have access to all of their money” and that no losses from either bank’s failure would be “borne by the taxpayer.”The Fed said it would set up an emergency lending program, with approval from the Treasury, to provide additional funding to eligible banks and help ensure they could “meet the needs of all their depositors.”March 13President Biden said in a speech that the U.S. banking system was safe and insisted that taxpayers would not pay for any bailouts in an attempt to ward off a crisis of confidence in the financial system.Regional bank stocks plunged after the unexpected seizure of Silicon Valley Bank and Signature Bank, with shares of First Republic tumbling 60 percent.The Bank of England announced that banking giant HSBC would buy Silicon Valley Bank’s British subsidiary.March 14Bank stocks recouped some of their losses as investor fears began to ease.The Justice Department and the Securities and Exchange Commission reportedly opened investigations into Silicon Valley Bank’s collapse.March 15Credit Suisse shares tumbled after investors started to fear that the bank would run out of money. Officials at Switzerland’s central bank said it would step in and provide support to Credit Suisse if necessary.March 16Eleven of the largest U.S. banks came together to inject $30 billion into First Republic, which was teetering on the brink of collapse. The plan was hatched by Ms. Yellen and Jamie Dimon, the chief executive of JPMorgan Chase. The Treasury secretary believed the actions by the private sector would help underscore confidence in the stability of the banking system. Shares of the bank rallied on the announcement.Credit Suisse said it planned to borrow as much as $54 billion from the Swiss National Bank to stave off concerns about its financial health.Ms. Yellen testified before the Senate Finance Committee and sought to reassure the public that U.S. banks were “sound” and deposits were safe.March 17The shares of many banks continued to slide, wiping out the previous day’s gains as investors continued to worry about the financial turmoil.One day after the $30 billion lifeline was announced, First Republic’s stock plummeted again and it was in talks to sell a piece of itself to other banks or private equity firms.March 19UBS, Switzerland’s largest bank, agreed to buy its smaller rival, Credit Suisse, for about $3.2 billion. The Swiss National Bank agreed to lend up to 100 billion Swiss francs to UBS to help close the deal. The Swiss financial regulatory agency also wiped out $17 billion worth of Credit Suisse’s bonds and eliminated the need for UBS shareholders to vote on the deal.The Fed and five other global central banks took steps to ensure that dollars would remain readily available in a move intended to ease pressure on the global financial system.The F.D.I.C. said it had entered into an agreement to sell the 40 former branches of Signature Bank to New York Community Bancorp.March 26First Citizens BancShares agreed to acquire Silicon Valley Bank in a government-backed deal that included the purchase of about $72 billion in loans at a discount of $16.5 billion. It also included the transfer of all the bank’s deposits, which were worth $56 billion. About $90 billion in the bank’s securities and other assets were not included in the sale and remained in the F.D.I.C.’s control.March 30Mr. Biden called on financial regulators to strengthen oversight of midsize banks that faced reduced scrutiny after the Trump administration weakened some regulations. The president proposed requiring banks to protect themselves against potential losses and maintain enough access to cash so they could better endure a crisis, among other things.March 28While testifying before Congress, officials at the Fed, the F.D.I.C. and the Treasury Department faced tough questions from lawmakers about the factors that led to the failures of Silicon Valley Bank and Signature Bank.Michael S. Barr, the Fed’s vice chair for supervision, blamed bank executives and said the Fed was examining what went wrong, but provided little explanation as to why supervisors did not prevent the collapse.April 14The country’s largest banks — including JPMorgan Chase, Citigroup and Wells Fargo — reported robust first-quarter earnings, signaling that many customers had developed a strong preference for larger institutions they viewed as safer.April 24First Republic’s latest earnings report showed that the bank lost $102 billion in customer deposits during the first quarter — well over half the $176 billion it held at the end of last year — not including the temporary $30 billion lifeline. The bank said it would cut up to a quarter of its work force and reduce executive compensation by an unspecified amount.In a conference call with Wall Street analysts, the bank’s executives said little and declined to take questions.The bank’s stock dropped about 20 percent in extended trading after rising more than 10 percent before the report’s release.April 25First Republic’s stock closed down 50 percent after the troubling earnings report.April 26First Republic’s stock continued its tumble, dropping about 30 percent and closing the day at just $5.69, a decline from about $150 a year earlier.April 28The Fed released a report faulting itself for failing to “take forceful enough action” ahead of Silicon Valley Bank’s collapse. The F.D.I.C. released a separate report that criticized Signature Bank’s “poor management” and insufficient risk policing practices.May 1First Republic was taken over by the F.D.I.C. and immediately sold to JPMorgan Chase, making it the second biggest U.S. bank by assets to collapse after Washington Mutual in 2008. More

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    As the Fed Raises Rates, Worries Grow About Corporate Bonds

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    Executives, analysts and bond traders are all wondering if corporate finance is about to unravel as interest rates rise.As the Federal Reserve raises interest rates in an effort to tame inflation, the corporate bond market, which lends money to many companies, has been hammered particularly hard.The steep rise in interest rates has caused bond values to tumble: From October 2021 to October 2022, an index that tracks investment-grade corporate bonds is down by roughly 20 percent. By some measures, overall bond market losses have been worse than at any time since 1926.Even the price of bonds issued by the highest-rated corporations have cratered this year.The ICE BofA US Corporate Index, which tracks the performance of U.S. dollar denominated investment grade rated U.S. corporate debt, has severely declined.

    Source: Federal Reserve Bank of St. LouisBy The New York TimesThe yield on bonds issued by solid businesses is now about 6 percent, about twice as much as it was a year ago. That number indicates how high of an interest rate rock-solid corporations would have to pay to borrow more money right now; rates are even higher for smaller businesses or those that investors consider risky.Corporate bankruptcies and defaults remain low by historical standards, but a growing number of companies are struggling financially. Businesses in industries like retail, manufacturing and real estate are especially vulnerable because their sales are weak or falling. In many cases, their customers have also been hurt by higher interest rates because the higher borrowing costs have effectively raised the costs of big-tickets items like homes and cars.Until recently, for example, Carvana was a fast growing used car retailer with a soaring stock. The number of cars the company sold fell 8 percent in the third quarter, and its spending on interest payments tripled compared with the same period a year earlier. The interest rate on a big chunk of its debt issued this year that matures in 2030 is 10.25 percent. Its bonds are trading at less than 50 cents to the dollar, suggesting that investors would require Carvana to pay an interest rate of nearly 30 percent if it were to borrow more money for the same amount of time. The company’s stock is down more than 90 percent over the last year.“There’s certainly a lot of headwinds,” Ernest Garcia III, Carvana’s chief executive, said on a conference call with analysts last week. “Recently, we’ve seen car prices depreciate to the tune of give or take 10 percent so far this year, but we’ve also seen interest rates shoot up very rapidly and I think that overall has harmed affordability,” he added, even as he expressed optimism about the company’s ability to weather the financial storm.Carvana, Co. has paid more in interest payments in the last quarter compared to last year and sold fewer cars.Joe Raedle/Getty ImagesBefore rates jumped, companies borrowed a ton of money last year, with lower-rated firms selling more new bonds in 2021 than in any other year. But that flow has turned into a trickle as interest rates have risen and investors have grown more discerning about whom they lend money to. Banks are still making more commercial and industrial loans, but they are also becoming more discerning and are charging higher interest rates.Most investors, executives and economists expect a recession or anemic growth next year, which could make doing business, borrowing money and paying off loans even more difficult.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

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    What Will Happen if Russia Defaults on Its Debt?

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    The ultimate arbiter of a sovereign default is an open question but markets may have the final word.WASHINGTON — Russia is ambling toward a major default on its foreign debt, a grim milestone that it has not seen since the Bolshevik Revolution more than a century ago and one that raises the prospect of years of legal wrangling and a global hunt by bondholders for Russian assets.The looming default is the result of sanctions that have immobilized about half of Russia’s $640 billion of foreign currency reserves, straining the country’s ability to make bond repayments in the currency the debt was issued in — dollars. Girding for a default, Russia has already pre-emptively dismissed it as an “artificial” result of sanctions imposed by the United States and its allies, and it has threatened to contest such an outcome in court.The coming fight, which would probably pit Russia against big investors from around the world, raises murky questions over who gets to decide if a nation has actually defaulted in the rare case where sanctions have curbed a country’s ability to pay its debts.Russia does not appear likely to take the declaration of a default lightly. If that should occur, it would raise Russia’s cost of borrowing for years to come and effectively lock it out of international capital markets, weighing on an economy that is already expected to contract sharply this year. It would also be a stain on the economic stewardship of President Vladimir V. Putin that would underscore the costs Russia is incurring from its invasion of Ukraine.At stake for Russia, which has already suffered the abrupt rupture of decades of crucial business ties with the United States, Europe and other nations, is one of the underpinnings of economic growth: the ability to smoothly borrow money from outside its borders.Since Russia’s predicament is so unusual, it remains something of an open question who is the ultimate arbiter of a sovereign debt default.“This points to the squishiness and patchwork nature of sovereign debt markets,” said Tim Samples, a legal studies professor at the University of Georgia’s Terry College of Business and an expert on sovereign debt. “I think this is set to be convoluted and disputed for a variety of reasons.”Mr. Samples suggested that there could be a “cascade” of events that brings Russia to a default.The most direct verdict could come from the big credit ratings agencies, which have already signaled that Russia’s credit worthiness is eroding and that a default could be on the horizon.This past week, Moody’s warned that Russia’s payment of about $650 million of dollar-denominated debt in rubles on April 4 could be considered a default if it does not reverse course and pay in dollars by May 4, when a 30-day grace period concludes. That followed a similar warning earlier in the week by S&P Global, which placed Russia under a “selective default” rating.But it is not clear how the ratings agencies will weigh in if Russia fails to make payments after its grace periods run out because of European Union sanctions that have restricted the agencies from rating Russia. Spokesmen from Moody’s and S&P did not comment. A Fitch spokesman said he could not offer any comments on Russia’s creditworthiness in light of the sanctions.The Biden administration put additional pressure on Russia earlier this month when the Treasury Department started blocking Russia from making debt payments using dollars held in American banks. That new restriction was intended to force Russia to choose between draining the remaining dollar reserves it has in Russia or using new revenue (from natural gas payments, for example) to make bond payments and avoid defaulting on its debt.Russia can still make payments on Russian sovereign debt as long as it is not trying to use funds from Russian government accounts that are held in American financial institutions.After the grace period on the foreign currency bond payments expires on May 4, the next key moment will be May 25. That is when American bondholders will no longer be able to accept Russian debt payments under a temporary exemption that the Treasury Department has allowed.The Russian central bank’s offices in Moscow. A default would raise Russia’s cost of borrowing and effectively lock it out of international capital markets.The New York TimesWhile the verdict of the ratings agencies carries significant weight, bondholders will determine the consequences of Russia failing to make payments that were due or that violate the terms of its contracts. The bondholders could take a wait-and-see approach or declare that the bonds are immediately due and payable, which could cause other bonds with “cross default” provisions to also be in default.Another potential arbiter of default is the Credit Derivatives Determination Committee, which is a panel of investors in the market for default insurance, or credit-default swaps. The committee is deliberating whether Russia’s payments in rubles constitute a “failure to pay,” which would kick-start insurance payouts. The panel already ruled that the state-owned​​ Russian Railways JSC was in default for missing a bond interest payment.To some analysts, that decision and the payments in rubles mean that Russia already is technically in default.“If Russia doesn’t pay on time, doesn’t pay in the currency in the contract, that’s a default — it’s crystal clear,” said Timothy Ash, a senior sovereign strategist at BlueBay Asset Management. “For all intents and purposes, Russia is already in default.”The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

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    Dollars or Rubles? Russian Debt Payments Are Due, and Uncertain.

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    Citing sanctions, the Russian government warned it might pay foreign debt obligations in rubles. Credit rating agencies say a default is imminent. Russia is teetering on the edge of a possible sovereign debt default, and the first sign could come as soon as Wednesday.The Russian government owes about $40 billion in debt denominated in U.S. dollars and euros, and half of those bonds are owned by foreign investors. And Russian corporations have racked up approximately $100 billion in foreign currency debt, JPMorgan estimates.On Wednesday, $117 million in interest payments on dollar-denominated government debt are due.But Russia is increasingly isolated from global financial markets, and investors are losing hope that they will see their money. As the government strives to protect what’s left of its access to foreign currency, it has suggested it would pay its dollar- or euro-denominated debt obligations in rubles instead. That has prompted credit rating agencies to warn of an imminent default.The Russian currency has lost nearly 40 percent of its value against the U.S. dollar in the past month. Even if the payments were made, economic sanctions would make it difficult for Western lenders to access the rubles if they are in Russian bank accounts.“It is not that Russia doesn’t have money,” Kristalina Georgieva, managing director of the International Monetary Fund, told reporters last week. The problem is, Russia can’t use a lot of its international currency reserves, she said, because they have been frozen by sanctions. “I’m not going to speculate what may or may not happen, but just to say that no more we talk about Russian default as an improbable event.”Last week, the chief economist of the World Bank said Russia and Belarus were squarely in “default territory,” and Fitch Ratings said a default was imminent because sanctions had diminished Russia’s willingness to repay its foreign debts.Russia last defaulted on its debt in 1998, when a currency crisis led it to default on ruble-denominated debt and temporarily ban foreign debt payments. The crisis shocked the financial world, leading to the collapse of the U.S. hedge fund Long-Term Capital Management, which required Federal Reserve intervention and a multibillion-dollar bailout. If Russia failed to make payments on its foreign currency debt, it would be its first such default since the 1917 Russian Revolution.Foreign investor interest in Russian assets fell in 2014 when sanctions were imposed after the country annexed Crimea, and never fully recovered before more sanctions were imposed by Washington in 2019. But holdings aren’t negligible. Russian government bonds were considered investment grade as recently as a few weeks ago, and were included in indexes used to benchmark other funds. JPMorgan estimates that international investors own 22 percent of Russian companies’ foreign currency debt.BlackRock, the world’s largest asset manager, has already incurred losses on Russian assets and equities.Jeenah Moon/BloombergFunds managed by BlackRock, the world’s largest asset manager, have incurred $17 billion in losses on Russian assets, including equities, in recent weeks, according to the firm. The loss in value has a number of causes, including investors selling their holdings.But so far, regulators have said the risk to global banking systems from a Russian default wouldn’t be systemic because of the limited direct exposure to Russian assets. The larger ramifications from the war in Ukraine and Russia’s economic isolation are from higher energy and food prices.Still, financial companies have been scrambling to assess their exposure, according to Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions.“I’m seeing a lot of clients that had exposure to the Russian market wondering what type of default scenarios might be coming up,” said Mr. Tannebaum, who is also a former Treasury Department official. In the case of a default, “those bonds become worthless, for lack of a better term,” he said.On Monday, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.” The government has the money to meet its debt obligations, he said, but sanctions were hampering its ability to pay. Mr. Siluanov had also said over the weekend that the country had lost access to about $300 billion of its $640 billion currency reserves.The government insists investors will be paid. The finance ministry said on Monday it would send instructions to banks to issue the payment due on dollar- or euro-denominated bonds in dollars or euros, but if the banks don’t execute the order then it will be recalled and payment will be made in rubles instead. The statement also said that the payments could be made in rubles and then converted to another currency only when the country’s gold and foreign exchange reserves are unfrozen.Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.”Alberto Pizzoli/Agence France-Presse — Getty Images“In any case, obligations to our investors will be met. And the ability to receive the funds in foreign currency will depend on the imposed restrictions,” Mr. Siluanov said.But the statement doesn’t provide a clear vision of what might happen on Wednesday. American sanctions allow for the receipt of payments of debt obligations until late May, and so the reasoning behind the Russian finance ministry’s claim that banks might refuse the payments is unclear. The payments due on Wednesday also have a 30-day grace period, so a default wouldn’t technically happen until mid-April. But Russia has already blocked interest payments on ruble-denominated bonds to nonresidents, a sign of its hesitancy to transfer funds abroad.While the Russian finance ministry said it could meet its obligations by paying in rubles, others disagreed.“In order to avoid a default, the only way that Russia can really navigate this is to send the full payment in dollars,” said Trang Nguyen, an emerging markets strategist at JPMorgan.Some Russian bonds issued in recent years do have provisions that allow for repayment in other currencies, including the ruble, if Russia can’t make payments in dollars for reasons “beyond its control.” The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More