Journal of Credit Risk

Covid-19 and the credit cycle: 2020 revisited and 2021 outlook

Edward I Altman

  • Trends are analyzed for 2020 and 2021 record new issuance and buildup in global and US debt, especially corporate and government levels, during the pandemic.
  • The remarkable transitions from a benign credit cycle in 2019, to a highly stressed cycle in early-mid 2020, to a return to a benign cycle in 2021 raise the question of how to measure where we are in the credit cycle.
  • Central banks reacted rapidly and with great success after the onset of the pandemic, limiting the damage done to equity and debt markets and motivating an amazing rebound that has continued to mid-2021; but possibly with unintended consequences as risky debt markets assumed an extreme, but perhaps still rational, "risk-on" profile.
  • Bankruptcies, defaults and default recoveries are closely analyzed post-March 2020, showing record levels of large US firm bankruptcies in 2020 and a doubling in high-yield bond default rates compared to 2019; followed by a remarkable reversal to low defaults in a benign credit cycle in 2021 – implications for the outlook in 2022–3. 
  • Two other markets and trends are analyzed using Z-score and other metrics: (1) the huge increase in BBB rated debt over the last 15 years and its resulting "fallen-angel" impact in the early and later stages of the pandemic, and (2) the increasing trend of corporate "zombies", globally.

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