Global Credit Conditions:
Triple Trouble: Virus, Oil & Volatility
Containment measures to stem the COVID-19 pandemic have pushed the world’s largest economies into near-hibernation. While China shows early signs of re-emerging from this, Europe and the U.S. aren’t yet past the viral peak. We have also yet to see the full impact on vulnerable emerging markets. Combined with historical collapse in oil prices, and record volatility in the markets, this put significant pressure on creditworthiness around the world. Industries most exposed to the dramatic drop in global demand and much tighter financing conditions have experienced the most downgrades so far.
We expect companies rated 'B-' and below will likely suffer most from rapid rating transitions, while the investment-grade segment is showing some resilience.
We estimate a surge in the corporate speculative-grade default rate to above 10% in the U.S. and into the high single digits in Europe.
The massive policy response from central banks and governments around the world is likely to soften the blow, particularly with regard to financial market liquidity.
Credit pressure is building up on emerging markets from U.S. dollar strength, massive capital outflows, commodity price falls, and the economic and health impact of COVID-19.
A severe but relatively short economic contraction (our base case) will mostly affect weaker credits or those in the most directly exposed sectors. But a prolonged recession, beyond our base case, would have broader implications.
COVID-19’s Global Spread
874k Cases, 180 Countries and U.S. now the epicenter
Oil & Gas
S&P Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure
—The oil price plummeted in early March following failed OPEC+ negotiations and Saudi Arabia’ s production increase.
—Oil markets are heading into a period of severe supply-demand imbalance in Q2 2020. Demand for oil and oil products is already weak and will decline materially in Q2 2020. The acute oversupply threatens to test the limits of crude and product storage as soon as May.
—Producers are under great pressure by investors to limit spending and maintain positive cash flow. Given negative investor sentiment, capital market access, and COVID-19 concerns, it is likely ratings actions in the IG space could be more severe.
Global Top Risks
Triggers For a Deeper Crisis
COVID-19 containment measures fail
- Confirmed cases (already in excess of 846,000—with more than 41,654 deaths) continue to grow at a rapid rate.
- This surge threatens capacity of countries’ healthcare systems, particularly in emerging markets, as the number of confirmed cases keep increasing in regions such as Latin America and Africa.
- China could emerge from lockdown with a more gradual lifting of social distancing and shallower recovery than expected, on the back of worries about a potential second wave.
- Risks remain firmly on the downside including on the length it will take to contain the pandemic across multiple geographies and risks of secondary waves before a vaccination developed.
Demand drop-off persists and supply disruption escalate
- S&P Global Ratings believes the effects of the coronavirus pandemic have already sunk the world economy into recession; we now forecast global GDP growth of just 0.4% this year.
- While assumptions around the timing of the outbreak’s peak about mid-year remain been broadly valid, the slow lifting of restrictions may further delay economic rebound.
- The economic disruption will be exacerbated by the severe dislocation in global supply-chains, the impact of the drop in demand on SMEs, on employment, and the time needed to re-establish consumer confidence and habits.
- China’s PMIs above 50 for March are not a surprise and do not suggest a V-shaped recovery. Most firms are still reporting lower employment levels compared to February suggesting a slower lift-off for the services sector.
Financial and commodity markets volatility worsen
- Slumping cash flows, tighter financing conditions, combined with the simultaneous oil price shock, could lead to a surge in defaults, particularly distressed exchanges—with the U.S. non-financial corporate default rate potentially rising above 10%, and Europe into the high single digits – over the next 12 months.
- Aggressive fiscal and monetary support are likely to soften the negative shock on the economy and limit some liquidity risks, but it is unlikely to prevent some deterioration in credit fundamentals.
- We expect the magnitude of defaults will vary significantly by industry and asset class in a severe but short recession (our base case) but a prolonged slump would have broader sector level implications.
Global Recession Will Amplify Defaults
—Market Turmoil. COVID-19 pandemic is pressuring the funding environment at a time when earnings for some sectors are expected to plummet under the strain of supply side disruptions and tanking demand.
—Distressed Credits. Rapid deterioration of credit risk pricing and oil pushes distressed credits to record highs at record speed; oil and gas hits distressed ratio of 94%.
—Low-Rated Issuers. A third of speculative-grade issuers are rated ‘B-’, highlighting default vulnerability.
U.S. Default Rate Forecast Through Dec. 2020
Global Credit Markets
—COVID19 and Oil-Related Downgrades. Over 170+ downgrades since Feb. 3, 2020.
—Corporate downgrades and defaults. Over 80% of downgrades were seen among speculative-grade companies; global recession likely to push U.S. default rate to 10%. Global default tally now at 28 issuers for 2020.
—Fallen angels. 69 Potential Fallen Angels (as of Mar. 25) account for ~2% of investmentgrade issuers; Recent fallen angels include Ford, Delta Airlines, and Occidental Petroleum; potential fallen angels include British Airways and Hilton.
COVID19 and Oil Price War Resulted In About 400 Negative Rating Actions (Downgrades, Outlook changes, CreditWatch Negative)
Credit Conditions Europe
Europe Goes Into Lockdown
Credit conditions in Europe are set to worsen as containment measures to restrict the spread of the coronoavirus have forced the authorities to place economies on life support. We expect the second quarter to see the nadir, but the duration of the outbreak and the credit implications are highly uncertain and nonlinear. Top risks include a worsening pandemic despite all efforts, scarcity of financing for indebted corporate borrowers, the re-emergence of global trade tensions including between the EU and U.K., and asymmetric fiscal costs from the pandemic placing renewed pressure on the EU's cohesion. Aggressive measures to ensure that credit remains accessible to business and that employees can remain on the payroll are supporting liquidity and provide some protection to the supply side of the economy. But the demand shock will weaken credit quality, particularly for corporates in consumer discretionary-facing sectors and those with already stretched balance sheets.
EMEA | COVID-19 Related Rating Actions
Credit Conditions North America
Unprecedented Uncertainty Slams Credit
Credit Conditions in North America look set to remain extraordinarily difficult for borrowers at least into the second half of the year, with the economic stop associated with coronavirus containment and mitigation measures continuing with no clear end in sight. Intense pressure on the credit quality of borrowers won't soon subside, as cash flows slump and financing conditions materially diverge between investment- and speculative-grade borrowers.
North America | COVID-19 Related Rating Actions
Credit Conditions Emerging Markets
COVID-19 Magnifies Risks
Emerging markets (EMs) are facing severe stress resulting from three simultaneous shocks, as the COVID-19 pandemic spreads globally. All key emerging economies that we cover will fall into recession or see sharply lower growth in 2020. Downside risks are significant. A prolonged outbreak will depress economic activity and stress health systems. Extended shock to investor sentiment could result in heightened refinancing risk, especially for low rated issuers.
COVID-19 Cases Advance, Containment Measures will Further Pressure Emerging Markets Economies
Credit Conditions Asia-Pacific
As Bad As 1997
Credit conditions in Asia-Pacific going into the second half 2020 look tough. The COVID-19 pandemic and increasing attendant health controls across Asia-Pacific ex-China are dampening business and consumer sentiment and movement of people and goods. The consequent demand shock is translating to an environment as challenging as the Asian Financial Crisis of 1997-1998.
Asia-Pacific: COVID-19 spread, GDP and Sector Impact