Published on
The Guardian/UK

Debt Crisis: The Companies Now Worth More to Investors Than US Government

Johnson & Johnson, Microsoft and ExxonMobil safer investment bets if US sovereign debt loses AAA credit rating

Juliette Garside

Kraft, the American food giant that bought up Cadbury, now has a better CDS rate then the US government. (Photograph: Christopher Furlong/Getty Images)

The royal borough of Kensington and Chelsea, a handful of big companies and a selection of countries including the UK and Australia will be regarded as a safer bet for international investors than the United States if the world's largest economy is stripped of its top notch rating, according to rankings drawn up the ratings agency Standard & Poor's.

With increasing speculation that credit ratings agencies will downgrade US sovereign debt, and with the value of a number of European bonds approaching junk status, investors are now casting about for new and safer places to put their money. Johnson & Johnson, maker of Band-Aid plasters and Listerine mouthwash, and SMRT, an obscure Singapore transport company, are among the corporations enjoying AAA ratings. The others are: ExxonMobil; Imperial Oil; Microsoft; back office outsourcing group Automatic Data Processing; Koch Financial Products, which leases assets to US government agencies and schools; medical research funder the Wellcome Trust; agricultural bank Rabobank; and Hong Kong transport group MTR.

"What we have seen is a big shift of money into very safe assets," says Luca Paolini at the Credit Suisse global strategy team. "We are not particularly bullish on corporate bonds but if you have a situation like right now in the US and you want to be covered from the risk of default that's the most obvious place to go."

While five of the G7 nations remain AAA for now, Japan has suffered a series of downgrades, most recently in January when S&P handed out an AA- rating. Italy ranks even lower, on A+, with an outlook recently changed from "stable" to "negative" as jitters about the health of the eurozone continue to mount.

Credit Suisse has produced a list of stocks with a combination of high credit rating and comparatively low debt, which are insured against default – through credit default swaps – at a cheaper rate than their national governments. Drugs groups Pfizer and Merck, together with Marlboro cigarettes firm Philip Morris, Dairylea cheese group Kraft Foods and oil major ConocoPhillips all have a better CDS rate than the American government.

According to Harvinder Sian, interest rate strategist at Royal Bank of Scotland, corporate bonds are tempting investors because there are few other national bond markets as large. US Treasuries (bonds) account for 54% of the money invested in AAA sovereign debt. The most attractive AAA economies like Sweden and Denmark account for barely 1% each. The only real alternative are German Bunds.

David Page, senior economist at Lloyds Corporate Markets, believes the move to corporate bonds could become an established investment pattern if US Treasuries are downgraded: "If the debt ceiling issue is a sideshow and the ratings agencies are unimpressed by whatever measures Congress comes up with on national debt, it may be the start of a more long-lasting trend as investors search for new areas to place cash."

If the US is downgraded, the ratings agency league tables will place the world's largest economy on a lower rating than Guernsey and the Isle of Man.

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