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Xerox Corp.’s relegation to junk may come as little surprise to those warning about a minefield of debt building in corporate America, from the likes of Jes Staley at Barclays Plc to Bruce Richards at Marathon Asset Management.

But the bigger takeaway: Why are there so few fallen angels at this late stage of the cycle even as companies sit on potentially bigger debt piles than just before the last two downturns. It’s a question preoccupying minds at JPMorgan Chase & Co.

“More than half of BBB companies in the U.S. and Europe look more like high yield than high grade” based on their leverage multiples, strategists including Nikolaos Panigirtzoglou wrote in a note to clients. “This suggests that the downgrade and fallen angel risks look pretty elevated at the moment.”

(Related: Legal & General Unit Fund Manager Predicts Credit Slump Will Worsen)

The Dec. 14 report, distributed the same day that copy-machine behemoth Xerox lost its investment-grade rating from Moody’s Investors Service, cited a steep rise in debt multiples and a low count of fallen angels more synonymous with the start of the credit cycle than the end.

“Corporates are currently much more vulnerable to a decline in incomes and rise in interest rates than in the previous two cycles,” according to the strategists. They said this could create “a disorderly transfer of risk between high-grade and high-yield markets.”

The note doesn’t specifically mention Xerox, which was downgraded to junk by S&P Global Ratings on Monday.

JPMorgan strategists are the latest to warn on stress at BBB rated companies with roughly $2.5 trillion of bonds that some warn could set off the next U.S. recession. Barclays Chief Executive Officer Staley said Nov. 30 regulators should take steps to prevent a wave of fallen-angel downgrades swamping a junk-bond market that “doesn’t have the capacity to absorb” it.

Richards, chairman and CEO of Marathon Asset Management, used more colorful language last month. “When these tens of billions or potentially hundreds of billions falls into junk land, it’s ‘Watch out below!’ because there’s going to be enormous price adjustments,” Richards said in a Nov. 8 Bloomberg Television interview.

With tax cuts, still-robust global expansion and corporate-earnings growth, there are plenty of sanguine voices on Wall Street, of course.

AllianceBernstein is calling for more of a “flurry” than a “blizzard” of fallen angels when the cycle turns, according to a blog post Monday. S&P said earlier this month that the BBB risks may be overstated, while Bloomberg Intelligence reckons the bond market is largely “equipped” to manage the risk.

Regardless, the ranks of fallen angels may increase, soon enough. PG&E Corp., with $18 billion of bond debt, has a 50-50 chance of being downgraded to junk by S&P “in the next few months,” an analyst at the ratings firm said Nov. 19.

—With assistance from Molly Smith.

Editor’s Note: Why This Matters to Agents

Life insurers make heavy use of high-grade corporate bonds to back obligations related to life insurance policies, annuities, long-term care insurance, and other products that may pay benefits starting far in the future, or for long periods of time.

U.S. life insurers had about 48% of their $4.4 trillion in general account assets invested in corporate debt securities in 2017, according to data from the American Council of Life Insurers’ ACLI 2018 Life Insurers Fact Book.

How bonds perform affects what products life insurers can sell, and what insurers charge for the products.

— Read Life Insurers’ Investments Look Fine: Moody’son ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.

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