Credit Crunched - Big Borrowers On The Brink

Matthew Craft, 05.17.10, 05:00 PM EDT
Weeks after downgrading Greece to junk, S&P lists 65 borrowers that could be next.

For cash-rich companies and select countries, the credit crunch is long over. For other borrowers still struggling under their debts, however, it’s a long slog. In a recent report, the rating agency Standard & Poor’s counted 65 borrowers -- mostly U.S. firms -- at risk of following Greece by dropping from investment-grade into the junk bin.

Among U.S. companies S&P says could be the next “fallen angels” are student loan originator SLM ( SLM - news - people ), formerly called Sallie Mae, and International Lease Finance Corp., the aircraft leasing arm of beleaguered insurer AIG ( AIG - news - people ).

Even though many big corporations have had little trouble selling bonds, and the world’s largest debtor, the United States, is still able to pile on debt at historically low rates, the financial crisis lingers. S&P has pulled its investment-grade rating from nine issuers so far this year, turning $386 billion of bonds and loans into junk. Five of those downgrades came on April 27, when S&P grabbed headlines by lowering its ratings on Greece and four Greek banks.

Greek issuers account for six of this year’s nine “fallen angels.” Now, at least half of the 65 at-risk issuers are U.S. companies. The banking sector is especially vulnerable, S&P says, as many banks carry troubled loans tied to commercial real estate and residential construction. Among those on the list: Marshall & Ilsley ( MI - news - people ), Regions Financial ( RF - news - people ) and Zions BanCorp ( ZION - news - people ).

Rating agencies have been under fire for blessing risky real-estate investments with high marks during the credit bubble, but their ratings still hold weight. A junk rating can make borrowing prohibitively expensive, because creditors demand a higher interest rate in exchange for their cash. A downgrade to junk can also have a snowball effect, as funds that have limits on the amount of junk-rated debt they can hold are forced to sell bonds, pushing yields higher (when bond prices fall, yields rise and vice versa).

In Greece’s case, the country’s bond yields shot higher in response to S&P’s rating and helped push the European Union to craft a long-discussed bailout.

A drop from investment-grade to junk is just one step on the credit-rating ladder, from BBB to BB, but its impact on borrowing costs is outsized. S&P looked at yields over the past year and found that a BBB-rated company paid a yield that ranged from 4% to 8%. A BB-rated company paid a yield that ranged from more than 6% to nearly 12%.