UK - Companies affected by rating agencies' aggressive downgrading of corporate bonds could turn their backs on issuing such debt.
The move will cause further worry for pension funds which have already expressed concern about the shortage of investment grade bonds.
Royal & SunAlliance Investments managing director of worldwide bonds Andrew Tunks said the increasing number of downgrades could in some cases terminally damage companies whose credit-worthiness had been called into question.
The real value of debt has been kept high over the last five years largely because of persistent low inflation.
But this is set to change, with ratings agencies provoked into taking a more aggressive policy on downgrading after criticisms that the Enron scandal was not uncovered.
Tunks said: “Debt is now very dangerous and the ratings agencies are going to make debt even more dangerous. Those who invested in a triple-A or double-A portfolio of corporate bonds five years ago would now be looking at a portfolio of single-A and triple-B.
Boots head of corporate finance John Ralfe agreed that the downgrades had been prompted by the more difficult credit climate, especially the fall out from Enron.
Ralfe warned: “Pension funds have got to have a policy on how they react to changes in credit ratings.”
But the Boots Pension Scheme is one scheme that should not be greatly affected by the downgrades as most of its £2.4bn funds are invested triple-A sovereign debt. And such gloom about bond downgrades was not shared by all.
Bacon & Woodrow associate Martin Kraus saw a potential upturn in the market for bonds.
He said: “Given the demand that we are likely to continue to see from pension fund investors and other investors, I would be very surprised to see if corporate bond issuance dried up.”
Kraus predicted: “Within the next 12 months normal service will be resumed, the demand for corporate bonds will ensure that issuance resumes at a pretty hectic pace.”
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