There are a lot of BBB-rated corporate bonds out there, but investing in them should be fine.
Diana Vazza and other S&P Global analysts come to that conclusion in a new report on BBB-rated corporate debt.
BBB-rated debt has been making up a growing share of corporate debt, in part because life insurers and other safety-conscious institutional investors like the fact that BBB-rated bonds yield more than higher-rated bonds but still count as investment-grade bonds, not as speculative-grade junk bonds.
Life insurers had $841 billion in BBB-rated corporate bonds at the end of 2016, according to the most recent bond holding data available from the National Association of Insurance Commissioners. BBB-rated corporate bonds accounted for about 20% of life insurers’ general account assets.
When Good Companies Go Bad
Over a 10-year period, about 5% of corporate bond issuers that start out with a BBB rating default, Vazza and her colleagues write.
But, even when BBB-rated issuers gp bad, they usually take years to fall apart, the analysts write.
“Most of the companies that eventually defaulted were first downgraded to speculative grade, and, in most cases, this happened several years before their eventual defaults,” the analysts write.
In any given year, about 4.5% of the U.S. companies with BBB ratings become “fallen angels,” or companies that move from the investment-grade category to the sunk bond category.
When the Great Recession peaked, in 2009, 5.3% of the BBB-rated issuers became fallen angels.
“However, the pace of BBB downgrades has slowed considerably in the years since the financial crisis,” the S&P analysts write.
The number of BBB-rated companies that look as if they could become fallen angels is small, and those issuers have a total of only about $96 billion in BBB-rated debt, the analysts estimate.
Why Does This Matter to Agents?
Life insurance policies and annuities are like sausage wrappers for bonds and other life insurance company investment holdings.
To sell new life insurance policies and annuities at attractive prices, life insurers need access to a steady supply of high-quality bonds.
— Read Corporate Bonds Are Getting Junkier, on ThinkAdvisor.