After vetting dozens of events and having several lively conversations, my team has come up with our top ten events that had a material impact on credit in 2016, in no particular order.
Number one: China's bond market has faced increasing default risk as the country has embarked on supply side reform to cut industrial overcapacity. As the economy decelerates corporates in hard hit sectors -- including some owned by the central government – are having trouble paying their debt. Asian markets are also being affected by signs of a slowdown in Chinese property markets as some selling in Chinese bonds has spread uneasiness throughout the region.
Second on our list is the surprising Brexit outcome where British citizens voted on June 23rd to exit the European Union. The referendum shook global markets, including currencies, causing the British pound to fall to lowest level in decades.
Third, a week following the Brexit vote on June 27th, the United Kingdom lost its coveted ‘AAA’ Sovereign rating from S&P Global Ratings with a two-notch downgrade to ‘AA’.
Let’s now focus on other S&P Global Ratings’ downgrades.
There was quite a bit of high profile merger activity in 2016 represented by our fourth credit event: the announced $86 billion acquisition of Time Warner by AT&T. The intent of which is to add more original programming and content to support DirecTV. After the announcement, AT&T’s ‘BBB+’ rating was placed on CreditWatch negative by S&P Global Rating Services on October 24th.
Fifth, after surveying dozens of sovereign downgrades, we chose to focus again on Brazil given its political, economic and financial struggles. Rio de Janeiro did host the 2016 Summer Olympics, which many would arguably call a success; however, earlier in the year on February 17th, Brazil received another S&P Global Ratings downgrade with its foreign currency rating lowered to ‘BB’. Brazil was rated as high as ‘A-‘ in 2013. And, later in the year, President Dilma was impeached.
Our sixth and seventh major credit events for 2016 include the state downgrades for New Jersey and Illinois. For New Jersey, the state rating was lowered to ‘A-‘ on November 14th. For Illinois, the state was lowered to ‘BBB’ on September 30th. In both cases, the states were adversely impacted by massive unfunded pension obligations that acted as an anchor on their creditworthiness. We also saw a similar impact caused by the credit risk introduced by pension funds outside of US municipalities. European companies, for example, have been significantly affected, with over a fifth of S&P Global Ratings analysts in Europe assessing that the impact of pension liabilities has been substantial. Our eighth credit event for 2016 is the downgrade of Exxon Mobil from ‘AAA’ to ‘AA+’ on April 26th. Exxon Mobil has held on and defended its ‘AAA’ since the great depression. However, a vast downturn in the Oil and Gas sector that has driven many energy companies into bankruptcy was too much to overcome. Now, there are only two remaining ‘AAA’ corporations: Microsoft and Johnson & Johnson. In addition, Rex Tillerson has been nominated to be the Secretary of State in the Trump administration, a controversial decision that might have an impact on global credit risk in general, leaving Exxon Mobil without their CEO of the past 10 years.
Returning to the bankruptcy theme, our ninth credit event was the largest retail bankruptcy in 2016: Sports Authority shutting down 460 stores. Clearly, like many retailers worldwide, its inability to adapt to an e-commerce world led to its eventual downfall. Our tenth and final event was the somewhat surprising United States presidential election outcome. While there have been no immediate credit impacts, monitoring the Trump administration in 2017 and beyond will include assessing how scaling back regulation, in particular Dodd-Frank, could introduce heightened systemic risk within the United States and globally.