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In This List

European Corporate Credit Risk Outlook; COVID-19 Pandemic and Macroeconomic Scenarios

Industries Most and Least Impacted by COVID-19 from a Probability of Default Perspective – September 2020 Update

Infrastructure Issues: Understanding and Mitigating Risks

Trade Payment Risk Is Not Necessarily Default Risk

Transcript: Coronavirus Insights - An Outlook on Corporate Credit Risk and IFRS 9 Implications


European Corporate Credit Risk Outlook; COVID-19 Pandemic and Macroeconomic Scenarios

As European countries are slowly starting to ease COVID-19 related restrictions, a bumpy road to economic recovery begins. Many European governments provided extensive support to businesses and individuals to help ease the impacts of multiple weeks of lockdowns. However, the macroeconomic projections indicate the road to recovery will be slow and twisted, as many factors will determine the final extent of the pandemic fallout.

To help navigate this challenging road ahead, we conducted an analysis of how the credit risk of firm’s may change based on macroeconomic projections. We employ S&P Global Market Intelligence’s Macro-Scenario model, which leverages the historical statistical relationship between macroeconomic conditions and corresponding changes in credit risk to assess the impact of future macroeconomic conditions.[1] In this analysis, we focus on the macroeconomic conditions in Europe and assess the potential credit risk impacts for private and public companies across various industries.

Macroeconomic Scenarios

Whilst other recession periods unfolded across many months, the “sudden stop” macroeconomic situation continues to be unprecedented in many ways. It represents a global downturn, driven by both supply and demand shocks, and in various ways enforced via the government-related restrictions. The path to economic recovery is thus uncertain and conditional on public health considerations. 

To provide an overview of the range of possible outcomes and gauge industries’ sensitivities to macroeconomic conditions, we analysed multiple economic stress scenarios, as listed in Table 1. As an initial baseline scenario, we leverage macroeconomic forecasts for Europe in Q4 of 2020, developed by economists at S&P Global Ratings as of July 11, 2020. Additionally, we construct two supplementary scenarios which help us gauge the industries’ credit risk sensitivity. The listed macroeconomic factors are commonly used for stress-testing purposes by banking industry regulators and are also utilized by S&P Global Market Intelligence’s Macro-Scenario model.

Table 1: Macroeconomic Scenarios

Notes: Quarterly percentage change represent annualized change over the period.
Source: S&P Global Ratings Economists and S&P Global Market Intelligence. As of July 23, 2020. For illustrative purposes only.

Industry Risk Radar

As a baseline, we analyse the credit risk profile of different industries in Q4 2019 based on the latest available financials. We employ Probability of Default (PD) Model Fundamentals (PDFN), a statistical model that uses company financials and other socio-economic factors to estimate the credit risk of private and public companies, and calculates median credit risk by industry.[2] Our dataset includes more than 250,000 public and private companies across 14 of the biggest European economies. Next, we apply Macro-Scenario model and analyse the impact of the selected macroeconomic scenarios by industry sector.

Figure 1 shows the median credit risk by industry for the selected macroeconomic scenarios.[3] The severity of credit risk deterioration in these respective industries is driven by the characteristics of COVID-19 macroeconomic stress. A lack of consumer spending is projected to weaken the credit risk profile of companies in the retail, automotive, airlines, and hospitality industry. Slowdown of overall economic activity will negatively affect companies in the energy and metals & mining sector. Not all industries will feel the impact of COVID-19 so intensely, however. Pharmaceuticals, utilities and real estate industries entered this crisis with the comparatively better credit risk profile and will retain a less risky credit profile.

Figure 1: Macro-Scenario Credit Risk Radar

Notes: The analysis includes the following countries: Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Poland, Portugal, Spain, Sweden, and the United Kingdom.
Median credit score for each respective industry. Industries highlighted in red are projected to experience the highest relative and absolute increase in credit risk across all three scenarios. Industries highlighted in green are projected to experience the lowest relative and absolute increase in credit risk across all three scenarios.
Source: S&P Global Market Intelligence. As of July 23, 2020. For illustrative purposes only.

Continental Divide

The credit strength of industries in different countries and their relative importance for the national economies will determine the broader economic impact on individual countries. It is thus valuable to also consider how different countries could be impacted in various macroeconomic scenarios. The S&P Global Market Intelligence’s Macro-Scenario Europe model leverages European Union (EU)-wide macro-economic variables, but is optimized separately for different European regions to reflect differences/similarities of the evolution of the credit score across the business cycle.

Figure 2 shows the median credit score by country for the selected macroeconomic scenarios.[4] Differences in the composition of national economies affect how sensitive countries are to COVID-19 macroeconomic shocks. We also note that more severe macroeconomic scenarios disproportionally increase the credit risk gap between countries. In our analysis, the EU Med countries (France, Italy, Portugal, and Spain), which are more reliant on retail and hospitality sectors, could be worst affected. Germany, Netherland, and Sweden are projected to see a smaller increase in average credit risk across their economies.

Figure 2: Corporate Credit Risk by Country

Notes: Median credit score for each respective country.
Source: S&P Global Market Intelligence. As of July 23,, 2020. For illustrative purposes only.

Figure 3 helps us better understand the drivers of country credit risk divergence. We compare the median credit risk by industry for the two largest continental economies, France and Germany. As a proxy of the importance of individual industry, we use a percentage of companies in that industry and mark the top five largest industries for each country, which represent approximately 65% of all companies.

Before the onset of COVID-19 pandemic, the average corporate credit score in France was only slightly worse than in Germany. However, the scenario analysis shows a much higher negative impact on creditworthiness for companies in France. By comparing the industry composition, we note that France has proportionally much larger retail and capital goods sectors, which are one of the most impacted sectors in COVID-19 macroeconomic stress scenarios. Germany, in comparison, has larger Real Estate and Utilities sectors, which have on average lower credit risk and are projected to retain a less risky credit profile. These underlying characteristics determine how the impact of COVID-19 will be felt across the European continent.

Figure 3: Country Credit Risk Deep Dive

Notes: Median credit score for each respective industry. The bubble size serves as a proxy relative industry importance and denotes the percentage of companies in that industry.
Source: S&P Global Market Intelligence. As of July 23, 2020. For illustrative purposes only.

Point-In-Time Market View

The Macro-Scenario model produces a through-the-cycle (TTC) assessment of the average tendency of companies to transition to a different credit score. In addition to changes in TTC credit risk assessment, i.e. credit risk transition, the default rates for each credit category will likely change as well. To reflect the point-in-time (PIT) characteristics, the Macro-Scenario model incorporates a PIT adjustment to reflect current credit risk conditions. This adjustment leverages PD Model Market Signals, a structural market-driven model, to incorporate a market-implied view into the comprehensive PIT assessment of credit risk.

Figure 4 shows the PIT assessment of the credit risk profile by country. As a baseline, we use the median credit score by industry in Q4 2019 and apply S&P Global Economic Outlook Q4 2020 forecasts to calculate TTC credit risk changes due to credit transition, as demonstrated in Figure 2. Then we also apply PIT adjustment at the country level to obtain the most current assessment of the probability of default.[5]

As a result of market decline, the PIT adjustment significantly increases the average credit risk profile of companies across all countries. By again comparing France and Germany, we notice that in addition to a higher proportion of negative credit risk transitions (shown in dark blue), the market-implied credit risk view is significantly more negative for French companies (shown in yellow), reflecting more stressed PIT credit risk conditions. We observed high market-implied PIT credit risk adjustments for Belgium, Greece, and Spain. On the other side of the spectrum, PIT credit risk adjustments are modest for Denmark, Germany, and Poland.

Figure 4: Point-in-Time Macro-Scenario Credit Risk Profiles

Notes: Median probability of default for each respective country.
Source: S&P Global Market Intelligence. As of July 23, 2020. For illustrative purposes only.

Additional Consideration & Risk Factors

The current macroeconomic forecasts suggest that the increase in credit risk is projected to be substantial across many industries. We note that the effect will be disproportionately larger for companies that entered this crisis with lower credit scores. It is thus prudent to analyse various macroeconomic scenarios to gauge the potential outcomes.

The resilience of a specific company will depend on the characteristics of the industry and the severity and duration of market shock. With many restrictions imposed, normal operations for many companies remain restricted or even impossible. Liquidity, debt maturity profile, and operational flexibility will thus be important factors affecting the creditworthiness of companies. Smaller, private companies are especially at risk, since they are likely to experience more challenges accessing government support, have more limited operational flexibility, and lack of access to capital markets.

The wider economic policies in each country will importantly affect the creditworthiness of European companies and their road to recovery. Also, other factors like upcoming elections, trade relations with China and the U.S., and the unpredictable outcome of Brexit negotiations represent additional sources of country- and industry-specific risks. E.g., whilst COVID-19 has strongly impacted the service and retail sector, Brexit has a potential to adversely affect more export-dependent industries like capital goods and consumer products.

The increase in corporate credit risk will also have important implications for the calculation of the expected credit losses (ECL) and other risk-based capital measures. This can significantly impact financial institutions and, in turn, again affect the corporate sector via secondary effects, e.g., through lending behaviour.


[1] The PIT adjustments is calculated using median benchmark PD levels generated by Probability of Default Model Market Signals in the last three months vs in the last year.

[2] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

[3] S&P Global Market Intelligence: “Macro-Scenario Model”, White Paper, December 2019

[4] S&P Global Market Intelligence: “PD Model Fundamentals - Public Corporates”, White Paper, February 2020; S&P Global Market Intelligence: “PD Model Fundamentals – Private Corporates”, White Paper, February 2020

[5] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

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