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21 December 2011 By Neil Unmack, Agnes T. Crane

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 like Microsoft 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 world 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 mud-slinging over long term deficits.

In fact, investors are already much more comfortable with corporate credit. An index created by Markit which 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, Electricite de France, Siemens and Vinci all have had lower credit spreads than their respective sovereigns. Meanwhile, U.S. companies with top ratings like 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 percent of revenue (mostly tax revenue) compared to the average of just 48 percent for highly-rated companies, according to JPMorgan. The 12-month trailing default rate for U.S. companies considered investment grade is just 0.6 percent, 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.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book,’ produced in print and electronic form early in the New Year.


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