BLOG — Oct 09, 2024
Waves of Uncertainty: Surfing Credit Risk in the TMT Sector
By Akhilesh Singh and Jithin Vadakoott
This blog is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
The Technology, Media, and Telecom (TMT) sector is a pivotal force during global economic growth and innovation. It’s far-reaching influence touches various industries ranging from cloud computing to streaming services and 5G telecommunications. Beyond enhancing connectivity, the TMT sector revolutionizes how we access information and engage with our surroundings. As economies increasingly digitize, the TMT sectors impact will only grow, acting as a key driver of future resilience and expansion. However, amidst this transformative landscape, the sector faces a unique set of challenges that can significantly affect company performance and investor confidence. Rapid technological changes, regulatory pressures, and escalating cybersecurity risks, create an unpredictable landscape that demands a sophisticated approach to credit risk assessment. In this context, effective credit risk assessment becomes crucial for stakeholders to evaluate the financial health of TMT companies. By focusing on robust credit risk management, firms can better navigate these complexities and seize emerging opportunities while ensuring they maintain access to essential capital.
S&P Global Market Intelligence’s RiskGauge™ is a tool that combines different risk factors—like financial health, market trends, and social-economic conditions—to estimate the chance of default and link it to a credit score. This gives a complete picture of a company's creditworthiness. RiskGauge™ can also be used in monitoring systems to quickly spot areas with higher credit risk at both country and industry levels. It provides early alerts about rising credit risks for individual companies, helping stakeholders take action to address potential issues.
Figure 1 compares the rating changes of companies rated by S&P Global Ratings in the TMT sector with the median RiskGauge Probability of Default (PD) for 12000+ public companies in the same sector. The columns represent the percentage of TMT companies that were upgraded or downgraded by S&P Global Ratings each quarter, while the lines illustrate the weekly median RG probability of default for all public companies in the sector across various regions, starting from January 2021.
Notably, between Q2 2021 and Q4 2022, there was a significant number of downgrades. This trend was particularly evident in the North America and Europe regions. The rise in median RG probability of default during this time suggests a strong correlation between RG probability of default and S&P Global Ratings. The considerable stress within the TMT sector can be attributed to several factors. Hardware companies faced supply chain disruptions, while service-based companies encountered increased regulatory scrutiny for, particularly in the US and Europe. These challenges were further compounded by geopolitical tensions and evolving policy landscapes, which led to reduced reliance on China. However, in the last six quarters, there has been a marked improvement, with very few companies experiencing downgrades and a decline in the median RG probability of default. This positive trend suggests a potential recovery in the TMT sector, indicating a more stable outlook for the future.
Figure 1: Rating Changes and RiskGauge Median Benchmark for TMT Sector Companies
Source: S&P Global Market Intelligence as of Sep 10, 2024. For illustrative purposes only.
Let’s look at a specific company in the TMT sector to show how the Early Warning System (EWS) works with the RiskGauge probability of default score. The EWS checks the RG probability of default score every day and uses simple rules to spot any signs of rising credit risk. It shows these signals using an easy-to-understand traffic light color scale,[1] where different colors indicate the level of risk of default. This helps stakeholders make smart decisions based on the company’s financial health.
Atos SE, founded in 1982 and headquartered in Bezons, France, specializes in a wide range of digital transformation solutions and services. The company offers advanced computing, analytics, artificial intelligence, and automation solutions, along with cloud services, customer journey analytics, and digital customer experiences.[2] As shown in Figure 2, over the past eighteen months, the EWS has consistently delivered clear signals, shifting to red to indicate heightened default risk. S&P Global Ratings’ issuer credit ratings (ICR) for the same period are also displayed for reference. This capability demonstrates the EWS’s effectiveness in distinguishing between genuine default risks and normal fluctuations in the RiskGuage probability of default score.
The EWS in the RiskGauge probability of default score effectively tracked the decline in Atos SE's key financial metrics from 2020 to 2024. Total assets, retained earnings, and net incomeall saw a decrease, while total debt and liabilities remained releatively unchanged. As a result, the EWS signal shifted from green to red in August 2023, over nine months before the default event, allowing stakeholders to make informed decisions. In April 2024, following the termination of acquisition talks by Airbus SE for Atos's cybersecurity unit, the RG probability of default surged, causing a significant drop in the company’s share price in a single day. Ultimately, in July 2024, S&P Global Ratings downgraded Atos SE's issuer credit rating[3] to selective default.
Figure 2: Historical Evolution of Credit Risk for ATOS SE
Source: S&P Global Market Intelligence as of Sep 10, 2024. For illustrative purposes only.
The EWS has proven to be effective by regularly providing early warnings of increased default risk. This invaluable tool empowers stakeholders to make informed decisions before potential issues escalate into more severe challenges. Its ability to distinguish between genuine credit risks and ordinary fluctuations is instrumental in risk management, enabling the proactive identification of potential problems before they evolve into major financial challenges.
If you want to learn more about RiskGauge and EWS, please click here
[1] For more details, please refer to the Early Warning Signals Framework 1.0 White Paper
[2] Source: The S&P Capital IQ® Platform.
[3] Atos SE Downgraded To 'SD' On Entering Accelerated Safeguard Proceedings, S&P Global Ratings. As of: 26 July 2024.