Finance directors may start giving finance ministers a run for their money. The woeful state of national balance sheets will push risk-averse investors into highly rated companies, such as Microsoft Corp. and other cash-rich issuers best positioned to withstand uncertain times. Corporate bonds could prove more attractive than even top quality sovereigns.
Sovereign debt from developed nations used to be considered one of the surest bets for safety-conscious investors. States’ powers of taxation, and the printing presses in countries that controlled their own currencies, made default almost inconceivable. That’s clearly no longer the case. The euro crisis that began with Greece has cast doubt on the region’s bigger economies, such as Italy, Spain and even France. Even the United States’ full faith and credit is no longer stain-free after 2011’s congressional mudslinging over deficits.
In fact, investors are already much more comfortable with corporate credit. An index created by Markit that measures how expensive it is to insure a basket of investment-grade corporate bonds – excluding financial companies – showed it cost twice as much to protect against defaults of European sovereign bonds in early December. In Europe, companies including Enel SpA, Électricité de France, Siemens AG and Vinci all have had lower credit spreads than their respective sovereigns. Meanwhile, U.S. companies with top ratings, such as Microsoft, have seen credit spreads on their bonds actually drop since the beginning of the year.
There’s some logic for putting companies on still higher ground. France, one of Europe’s stronger sovereigns, had debt equivalent to 166 per cent of revenue (mostly tax revenue) compared with the average of just 48 per cent for highly-rated companies, according to JPMorgan. The 12-month trailing default rate for U.S. companies considered investment grade is just 0.6 per cent, according to Standard & Poor’s.
Corporates can’t hope to replace official fiscal authorities in terms of providing the market with the same amount of easy-to-trade debt. Companies also aren’t immune to the sovereign crisis: troubled governments may try to raise revenues by increasing taxes, or curry favour with voters by toughening up regulations. Yet, corporate debt can act as antidote to the violent ups and downs hitting sovereign debt and their proxies, financial institutions and broad stock indexes. At the very least, such bonds introduce a valuable element of diversification.