5 corporate-debt experts break down how the coronavirus crisis is ravaging cash-strapped firms - and share what they're buying to avoid risky 'zombie' companies

• Investors in the $8 trillion market for corporate debt are showing a preference for higher quality due to the sudden economic downturn.
• Five experts shared where they are finding value in this market and the industries they consider as land mines.
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"Buy what the Fed buys."

That sums up the investing recommendation Bank of America recently gave its clients in the $8 trillion corporate debt market.

Hans Mikkelsen, the firm's head of high-grade credit strategy, offered his advice in a note five days after the Fed announced that it would buy up corporate debt as part of its intervention into coronavirus-stricken markets.

But the central bank will only purchase bonds and exchange-traded funds that track companies with investment-grade ratings.

Mikkelsen's preference for higher-quality credit during a sudden economic downturn was shared by other experts interviewed by Business Insider. Their concern is that so-called zombie companies which owe their sustenance to cheap debt now face a reckoning as cash flows dry up and the economy contracts.

"For very high-quality bonds, the Fed intervention in the market has a very direct positive effect," Marty Fridson, the chief investment officer of Lehmann, Livian, Fridson Advisors, told Business Insider. "As you go down the quality spectrum, what the Fed is able to do has lesser impact."

Companies in industries like leisure, hospitality, and energy could be among the hardest hit by the economy's slowdown, Fridson added.

The Fed's preference for high quality once again raised the spectre of defaults and downgrades among BBB-rated companies at the lowest end of the investment-grade scale. Even before the coronavirus crisis hit, there was concern that the next economic crisis would accelerate the number of so-called fallen angels that get downgraded from BBB.

These companies may find a backstop in pension funds and other large investors that do not have to sell immediately after their holdings receive junk status, Fridson said.

The 'band-aids' might not be enough

Olivier d'Assier is less sanguine on the fate of fallen angels.

He observed that the spread between BBB-rated, non-financial corporate bonds that are dollar-denominated and their global counterparts spiked to nearly 400 basis points - the highest level since the financial crisis.

Additionally, the spike was the fastest over a 21-day period, according to d'Assier, the head of applied research, Asia-Pacific, at Qontigo.

While this seems like an attractive buying opportunity, not every investor is rushing back in.

"There's still a lot of concern about defaults and obviously that's reflective in the spread," said Terri Spath, the chief investment officer of Sierra Mutual Funds. Her Tactical Bond Fund has beaten its benchmark and gained nearly 9% this year partly because it sold high yield and bought Treasuries ahead of the blowout in spreads.

D'Assier cautioned against companies that find themselves cash-strapped in the economic downturn - including firms that executed buybacks and increased dividends during the bull market. Nordstrom, Kohl's, and Macy's are among the retailers that will possess less than a month's worth of cash if their sales dry up, the Wall Street Journal reported.

"It's a huge bubble and it started bursting last year already," d'Assier told Business Insider. "We're now applying band-aids everywhere we can - but it might not be enough."

Where to find value in a 'solvency crisis'

Mike Collins a senior portfolio manager at PGIM, expects to see plenty fallen angels emerge from the ongoing "solvency crisis."

These demotions will create value for high-yield investors who dive in to buy big, diversified companies at cheaper prices, Collins said.

"A lot of the value right now - where we're moving into - is in the higher-quality, short-to-intermediate part of the BB high-yield market that is really undervalued," Collins said. "That part will snap back the fastest because those companies generally don't have actual default risk."

Another reason to consider BB-rated bonds is that passive ETF managers will be forced to sell credit that will be newly junk-rated. This creates an opening for high-yield investors can to scoop up good companies at attractive prices.

In terms of what to avoid, Collins flagged commercial mortgage-backed securities that track office space. This area may not recover as much if working from home remains popular in a post-coronavirus world.

And get the latest coronavirus analysis and research from Business Insider Intelligence on how COVID-19 is impacting businesses.