S&P Global Ratings has embarked on an expanding study of the impact that a potential credit cycle downturn involving deteriorating economic and credit fundamentals--with rising defaults and scarce liquidity--may have on ratings and market conditions. This article, which will be periodically updated, is an edited compilation of the key takeaways from our "When The Cycle Turns" series.

Key Takeaways

Cross-sector

Next Debt Crisis: Earnings Recession Threat, Sept. 30, 2019

• Very low global corporate profits growth (1%) forewarns possible earnings and economic recessions (we estimate U.S. recession risk at 30%-35%).
• Aggressive corporate leverage (global sample's debt-to-earnings is 4.7x) is likely to rise, although our rated portfolio's leverage should steady.
• Low interest rates are keeping speculative-grade defaults down (2.1%), but high debt levels and slowing economies portend a future spike.

Credit Trends: The Expansion Of The 'B-' Segment Is Feeding Growing Vulnerabilities, Sept. 25, 2019

• The proportion of speculative-grade issuers rated 'B-' in both the U.S. and Europe has risen markedly since the start of 2017, reaching an all-time high of 20.5% in the U.S. at the end of the second quarter of 2019.
• The current populations of 'B-' issuers in these two regions are heavily concentrated in a handful of sectors, with high tech leading in the U.S. and consumer products in Europe.
• For collateralized loan obligations (CLOs), 'B-' credits are a potential cause of investor concern, as these issuers are one notch above the 'CCC' rating category, for which CLOs haircut the value of loans when calculating coverage tests.
• Even in relatively benign environments, 'B-' issuers have higher credit deterioration than the overall speculative-grade market. Past cycles of 'B-' credit deterioration (defined as the combined default and downgrade rate) have been particularly severe over a 12-month period, reaching 40%-50% in both regions during the most recent financial crisis.
• We expect the default rate to increase over the next 12 months in the U.S., as signs of stress have started to appear in financial markets and the economy. Our U.S. economists have also raised their recession forecast to a 30%-35% chance of starting in August 2020.

The Continued Attack Of The EBITDA Add-Back, Sept. 19, 2019

• Our review of a large sample of merger and acquisition (M&A) and leveraged buyout (LBO) transactions that originated between 2015 and 2018 show that, overall, add-backs inflated marketing EBITDA by an average of 28% and represented 49% of reported EBITDA at deal inception.
• Our data indicate that management projections at deal inception were aggressive, showing that, on average, actual reported net leverage was 3.1 turns higher than forecast for 2017 and 3.3 turns in 2018. Overestimated earnings were the primary contributor to the leverage disparity, with reported EBITDA 35% below marketing EBITDA for both 2017 and 2018.
• We believe marketing EBITDA including add-backs is typically not a good indicator for future EBITDA and that companies overestimate debt repayment. Combined, these effects understate leverage and credit risk and pose incremental event risk as many covenant baskets are tied to EBITDA.

European Leveraged Finance And Recovery Update, 2Q2019, Aug. 1, 2019

• Term loan issuance dominated total issuance in the European leveraged finance market in second-quarter 2019, with average recovery, according to our expectations, stable at 60%.
• A pickup in M&A activity fueled second-quarter issuance, though only a handful of issuers made their debut, further exacerbating the lack of portfolio diversity for investors in Europe--particularly for collateralized loan obligation vehicles.
• Reduced covenant protection, stretched all-senior leverage structures, and weak security packages limit the likelihood of an increase in average expected recovery.
• We estimate European speculative-grade first-lien debt recoveries for this cycle will average just under 60%, compared with over 73% historically.

Korean Corporate Credit Quality Feels The Squeeze, July 9, 2019

• For the first time since 2014, the credit quality of Korea's top 200 companies has weakened as a result of rising debt and stalled earnings in 2018.
• We expect economic slowdown amid heightening trade tensions, aggressive financial policies with rising capital expenditure (capex) and shareholder returns, as well as ongoing regulatory risks to apply downward pressure on Korean corporates' credit quality over the next 12 months.
• However, sudden changes to the credit ratings on Korean corporates are unlikely--given their good competitiveness, market position, and profitability.

How Low Will Recovery Rates Go? European Leveraged Finance Update Q1 2019, May 2, 2019

• S&P Global Ratings estimates European senior secured recovery for this cycle will average just under 60%, compared with over 70% in previous cycles.
• Three quarters of all European first-lien new issuance by value has an expected recovery of 50%-70%.
• In first quarter 2019, the average recovery rate for newly issued European senior secured (and first-lien) debt rated by S&P Global Ratings was just below 60%.

Credit FAQ: Assessing How Weak Loan Terms Threaten Recoveries, Feb. 19, 2019

• We expect weaker loan terms and structures to result in lower loan recoveries in the next default cycle.
• These terms may allow aggressive borrowers to undertake actions that could harm lender recovery prospects, such as distributing value to shareholders, transferring collateral to unrestricted subsidiaries, or raising additional debt.
• Some loan terms and structures are easier to factor into our ratings prospectively, while others are typically addressed in surveillance.

China's Long Credit Cycle Has Ended And Deleveraging Has Begun: Can It Be Sustained?, Aug. 19, 2018

• China's long credit cycle that begun in 2004 is over. Measured from peak to peak and using credit-to-GDP ratios, most key metrics are heading south.
• Based on past credit cycles, the authorities' current three-year deleveraging horizon will need to be made data-dependent, and most likely extended.
• Already we are seeing evidence that the authorities are fine-tuning the pace of deleveraging in response to (perhaps) larger-than-expected growth effects as well as the trade dispute with the U.S.

Leveraged Finance--Will The Worst Deals Be Done In The Best Of Times, Again?, April 10, 2018

• Cashed-up private equity is seeking debt from the leveraged loan markets to help fund mergers and acquisitions in 2018.
• The chase for yield is eroding debtholder returns at a time of escalating risks, making the risk/return profile of many leveraged loans issued so far in 2018 the weakest since late 2008.
• Meanwhile, institutional loans that are covenant-lite, have limited security packages, and borrower-friendly terms are widespread, adding to lender risks.
• As the credit cycle peaks, lenders are becoming more vulnerable to a sudden, sustained turn in risk appetite and tightening credit conditions.

Corporates

Recovery Prospects In The U.S. Media Sector, Sept. 26, 2019

• A concentration of speculative-grade ratings and high leverage underscore the U.S. media sector's low credit quality.
• However, the sector's first-lien debt-recovery prospects are above the corporate average, driven by lower-than-average priority debt levels and higher-than-average levels of junior debt cushion in certain subsectors.
• Moreover, first-lien recovery prospects for print and publishing in particular are surprisingly strong, despite the secular decline in commercial printing. However, refinancing of debt placed in legacy capital structures could worsen secured recoveries for some of these companies.
• Local TV broadcasters have the strongest first-lien recovery prospects among media companies due to their low leverage and significant junior debt cushions relative to those of other media companies.

Recovery Prospects In The U.S. Technology Sector, July 16, 2019

• The U.S. tech sector has an elevated risk of default, with the highest concentration of issuers rated 'B-' or lower.
• Prospective recovery rates for the technology sector is an area of increasing concern for investors given its high concentration in U.S. CLOs.
• Recovery prospects are below corporate average.

Health Care Subsectors Ranked By Vulnerability To Economic Downturn, April 29, 2019

• Health care remains a defensive industry. However, we believe it is more vulnerable to downturns given ratings deterioration (more vulnerable 'B' rated credits), relatively high leverage, and greater industry disruption.
• Disruption is increasing, on the payer side with the creation of health care "verticals" and ongoing shift to lower cost settings, and on the technology side with such developments as big data and fee-for-value metrics, changing business models.
• We believe hospitals, service providers, and hospital staffing services, which collectively dominate the lower end of the health care ratings spectrum, are the most vulnerable, given leverage metrics and relatively higher disruption, than other subsectors.

'BBB' Downgrade Risks In EMEA Nonfinancial Corporates Appear Manageable, April 15, 2019

• Gross reported debt of nonfinancial corporates rated in the 'BBB' category based in Europe, the Middle East, and Africa has surged by 80% or about $1.0 trillion since 2007 to about $2.2 trillion at year-end 2018.
• The largest single driver was about $1.5 trillion of debt downgraded from higher ratings, and we believe the most common reason is companies' increasing risk tolerance.
• We estimate up to about $250 billion of debt could fall to speculative grade a year in a severe downturn, although this is not our forecast for the next one-to-two years.
• This is about 10% of the outstanding amount, which we consider manageable for the market to absorb.

Rising Leverage And Disruption Weaken Speculative-Grade Health Care Companies, March 4, 2019

• For-profit health care ratings quality has deteriorated since the last downturn, in part because of private equity interest. With the increasing number of small, niche companies with significant leverage, more than 60% of ratings are at or below 'B'.
• The health care industry is increasingly focused on value-based care models and consumerism, leading companies to make significant investments that may take longer to materialize into EBITDA.
• High valuations and aggressive capital structures have burdened the balance sheets of new issuers, leaving little room for error.
• Debt leverage in speculative-grade U.S. health care (excluding not-for-profits) is at a historic high, above the median for U.S. corporates. Meanwhile, coverage ratios have declined, even in a low interest rate environment.
• Funds from operations (FFO) interest coverage has declined to around the corporate median, after being well above that over the prior 10 years.

Spanish Consumer Goods Companies See Tougher Times Ahead, Jan. 21, 2019

• Spanish consumer goods companies are entering into a phase of slower economic activity that will weigh on revenue growth in 2019 and 2020.
• The purchasing power of households will rise more slowly due to more sluggish job creation, which, combined with an already low savings rate, will translate into weaker growth in consumption and thus decreasing demand for consumer goods.
• We expect export-oriented, geographically diversified Spanish consumer goods companies to better cope with these domestic trends, but at the same time remain exposed to international trade tensions.
• Due to their exposure to economic cycles, Spanish companies in the consumer goods sector in our view will have to build sufficient buffers to maintain or improve their current creditworthiness in 2019 and 2020 as the economy slows.

Credit FAQ: 'BBB' Downgrade Risks May Be Overstated, Dec. 3, 2018

• Ratings on U.S. nonfinancial corporate issuers in the 'BBB' category have performed well over the past 35-plus years, even during periods of economic stress.
• Sizing downgrade risk based on our scenario analysis indicates $200 billion-$250 billion in potential fallen angel debt in the next recession. While material, this would be in line with past cycles when viewed as a percentage of the speculative-grade bond market, although we recognize further risks include the timing and composition of downgrades.
• While every cycle is unique, we believe strong business fundamentals and cash flow generation will support future ratings performance.
• Risks are posed by the significant amount of 'BBB' debt, the sizeable debt burden of a handful of issuers, as well as small pockets of higher leverage.
• Still, debt tends to be concentrated among the most stable sectors and issuers, with the majority of 'BBB' issuers leveraged below 3x in 2018 and 2019.

How Would Major Media Companies Fare In A Downturn?, Oct. 29, 2018

• Media companies are less exposed to economic cyclicality than in the past as non-advertising revenues, such as per-subscriber distribution fees, account for a greater share of overall revenues.
• Balance sheets for the companies we surveyed are already stretched because of merger and acquisition activity or aggressive share repurchases. Those companies, which already suspended or will soon suspend, share repurchases to reduce leverage, have limited financial tools to increase the pace of debt reduction in the event of an economic downturn.
• Our stress analysis shows that our ratings on Comcast, Disney, and Viacom are more vulnerable to economic stress. CBS and Discovery potentially have the financial flexibility (for example, the ability to halt or, in the case of Discovery, not resume share repurchases) to keep leverage within the bounds of the current ratings, although actual ratings performance will depend on the extent of an eventual downturn and each company's corresponding financial policy decisions. For AT&T, leverage is unlikely to worsen materially even in a recession because of the steady results from its wireless operations.

U.S. Coal Companies Seek Paydirt In Exports, Oct. 26, 2018

• U.S. coal producers are increasingly turning to export markets as domestic coal-fired power plants close down and utilities opt for natural gas and renewable sources for fuel.
• Falling domestic demand means that producers are taking on additional operating and financial risks when they look to sell into overseas markets.
• Producers with the highest-quality coal and best transport options to export their coal will have an advantage, even with moderate shocks to domestic demand and foreign currency and price risks.
• Credit quality is stabilizing for U.S. coal producers, as financial restructuring and capital constraints give way to shareholder returns and increased capital spending.
• We expect demand for coal in traditional overseas markets in Europe and Latin America to remain steady over the next year, while growth in Asia-Pacific markets will increase slightly.

Leverage Continues To Climb--Has It Finally Peaked?, Oct. 9, 2018

• Excessive leverage lowers issuers' financial flexibility and increases reliance on stable capital markets.
• Exacerbated volatility when the credit cycle turns may give rise to liquidity stress and potential defaults if market access is limited.
• With overseas cash more easily fungible, debt issuance to fund shareholder-friendly activity will most likely begin to deaccelerate.

The EBITDA Add-Back Fallacy, Sept. 24, 2018

• Our review of a sample of transactions originated during 2015 show that on the aggregate level, add-backs inflated projected EBITDA by an average of 45%.
• Our data indicate that management projections at deal inception were very aggressive; showing that on average, actual reported net leverage was 2.9 turns higher than forecast for 2016, growing to 3.6 turns in 2017. Overstated earnings was the primary contributor to the leverage disparity with reported EBITDA 29% below management projected adjusted EBITDA during 2016, growing to 34% in 2017.
• We conclude that 1) management-adjusted EBITDA including add-backs is not necessarily a good indicator for future EBITDA; 2) companies overestimate debt repayment; 3) combined, these effects understate future leverage and credit risk; and 4) add-backs also present incremental credit risk in the form of future event risk since covenants that rely on EBITDA may provide additional flexibility under negative covenants and restricted payments (dividends, debt and lien allowances, etc.).

Some Sectors May Hit A (Maturity) Wall, Sept. 20, 2018

• "When" the credit cycle turns may be important, as many companies have looming debt maturities that could coincide with a downturn.
• The oil and gas and retail and restaurants sectors are in particular danger, as both have a significant amount of speculative-grade debt coming due in the next few years. These approaching maturities--combined with a downturn--could lead to defaults across both sectors.
• Refinancing risk is manageable for now, but the market has experienced volatility that could cause panic.

U.S. Midyear Corporate Outlook: Peak, Plateau, Or Peril? As The Cycle Matures, A Stable Outlook For Now, Aug. 6, 2018

• At the end of the first half of 2018, 75% of U.S. corporate borrowers we rate had stable outlooks.
• Median leverage in the 'BBB' ratings category increased to 2.3x at the end of last year, from 1.9x in 2008, but this remains in line with our parameters for the category.
• S&P Global Ratings economists forecast U.S. real GDP growth of 3% and 2.5% in 2018 and 2019, respectively, with a low (10%) probability of a recession in the next 12 months.
• Heightened trade tensions, increased financial market volatility, and rising interest rates pose the greatest threats to favorable credit conditions.

U.S. 'BBB' Corporate Profiles Remain Firm Despite Rising Debt, July 25, 2018

• While total adjusted debt among U.S. nonfinancial corporate firms we rate in the 'BBB' category has swelled to $2.66 trillion, median leverage in the category remains low, at about 2.3x, up from 1.9x in 2008.
• U.S. corporate cash flow conversion has improved in the past decade thanks to factors such as corporate restructuring and, more recently, the U.S. tax bill.
• A strong mix of business risk profiles support investment-grade ratings. Low borrowing costs have resulted in some voluntary migration down the ratings scale; these credits typically have more levers to pull in times of stress (for example, reduction in their shareholder returns).
• While M&A could pose heightened risks, ratings have generally performed well over the two-year outlook horizon following large M&A deals in the 'BBB' category.

How Have M&A Transactions In Consumer Products Performed?, July 25, 2018

• We believe most consumer products companies can reduce the leverage on their balance sheets even if the assets they acquire aren't as successful as they expected at the outset of deals--which demonstrates the strength of these companies' cash flows, generally.

Will Consumer Companies' M&A-Related Debt Result In An Exodus From Investment Grade?, July 25, 2018

• For the past several years, consumer products companies have gorged on M&A as a way to counter anemic revenue growth--mainly among packaged food companies--that has fallen shy of economic growth.
• In part thanks to the benefit of the U.S. tax bill and the expected rise in interest rates, large transactions picked up late last year and into 2018.
• Capital structures at many borrowers we rate have become more aggressive, with leverage rising beyond historical levels. However, we believe these borrowers can reduce leverage over a two-year window and maintain investment-grade credit ratios.

As U.S. 'BBB' Debt Growth Sparks Investor Concern, Near-Term Risks Remain Low, July 25, 2018

• 'BBB' rated corporate debt accounts for a growing share of the U.S. corporate debt market, and 'BBB' bonds now surpasses $3 trillion, outpacing the entire speculative-grade segment.
• The weighted-average annual downgrade rate for 'BBB' rated issuers to the speculative-grade categories is 4.5%, and during the most recent credit cycles the annual downgrade rate for 'BBB' rated issuers peaked at 7.6% in 2009 and 9.2% in 2002.
• Both the number of potential fallen angels (which are issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications) and their related debt (less than $90 billion in associated debt) remains well below the highs reached during stress periods in 2002 and 2009.
• Although the current population of 'BBB' rated firms in the U.S. is large, it should remain stable from a credit perspective in the near- to medium-term horizon.

Insurers

Investment Impairments Will Bend But Not Break U.S. Life Insurers' Financial Strength, May 13, 2019

• U.S. life insurers are better prepared for the next downturn than they were for the Great Recession.
• Our hypothetical stress test results indicate minimal rating actions, with the current capital buffers able to absorb the effects of the stress test.
• The results of the stress test differ by the type of insurer. Mutuals were the least and private-alt owned insurers the most affected. Publicly traded insurers fell in the middle, with their stronger business profiles helping offset a temporary decline in capitalization.

Public Finance

U.S. Airport Balance Sheets--And Exposures--Increase With Traffic, July 9, 2019

• The current round of airport infrastructure investment is being driven by passenger growth to record traffic levels in the context of dated facilities and landside constraints at major hubs, with "billions" replacing "several hundred million" as operators prepare capital programs for forecasts of higher domestic and international traffic levels.
• U.S. airports have a proven funding and capital market financing model which, so far, has well-positioned them to address investment requirements.
• We expect that long-term debt, with a decreasing proportion of federal or state capital grants and passenger facility charges, will fund sizable capital needs across the U.S. airport sector.
• Airport credit quality has historically rebounded from declines in air travel due in part to solid business positions, strong management, and cost-recovery financial structures, although the airline concentration among the U.S. airport hub network has increased since 2009 and could be a credit negative for the sector in a significant downturn.
• Against the backdrop of very large capital programs and airline industry consolidation, we believe key risks are linked to how well airport operators maintain steady financial performance and debt capacity, especially if demand declines or leverage increases.

Government Framework Is A Significant Factor In States’ Ability To Navigate Downturns, May 23, 2019

• The government framework within which a state raises revenue, spends, and issues debt influences its ability to manage through various economic stress scenarios;
• Our assessment of government framework across states shows 30% are significantly stronger than the median, 50% are within 10%, and 20% are significantly weaker;
• While less likely to change in the short term compared to other factors, government framework remains a significant factor with a 20% weight to a state's indicative credit level;
• As a state's credit quality weakens, change in government framework becomes more significant and often correlates with further rating deterioration.

Are California's Historically High Budget Reserves Also A Bare Minimum?, Oct. 23, 2018

• Despite eight years of an improving budget position, California remains vulnerable to significant fiscal stress in a recession.
• A volatile revenue structure is California's primary fiscal risk factor.
• Constitutional funding formulas dictate major general fund expenditures and can stabilize budget imbalances automatically.
• Historically large budget reserves provide a significant one-time buffer to unanticipated revenue shortfalls.
• Budget stabilizers plus reserves could enable the state to weather a downturn.

U.S. States May Be Tested In Unprecedented Ways, Sept. 17, 2018

• Budget reserves are a first-line defense against revenue shortfalls and in a majority of states remain insufficient to absorb the first-year fiscal effects of a moderately severe recession.
• Most states nevertheless retain an adequate capacity to make fiscal adjustments in response to a downturn.
• Economic growth has accelerated in 2018, reducing the likelihood of a recession within the next 12 months.
• Evaluating state fiscal strength now, amid an expansion, is relevant because larger federal deficits and a still-low federal funds rate imply there could be less countercyclical support in the next downturn.

REITs

REITs Around The World Are Braced For Rising Rates, Tighter Funding Conditions, Oct. 10, 2018

• The REITS rated by S&P Global Ratings are generally well-positioned to withstand gradual tightening conditions as their capital structured is largely fixed or hedged.
• In the U.S., these entities have shored up their balance sheets against the backdrop of a Federal Reserve that is steadily raising interest rates as it normalizes monetary policy.
• Similarly, rising interest rates and tighter funding conditions pose key risks across the Asia-Pacific real estate markets.
• Most REITs in Europe have fixed or hedged their debt for the next 3-4 years, and the direct effects on funding costs and interest expense coverage ratios appears limited.

Asia-Pacific REITs Build A Rating Buffer As Interest Rates Rise, Oct. 3, 2018

• Asia-Pacific REITs have built a rating buffer that enables them to withstand a moderate rise in interest rates, given their limited amount of floating-rate debt, modest upcoming maturities, and robust interest coverage metrics.
• We expect interest rates to rise moderately across Asia-Pacific, and funding conditions to tighten as investor sentiment points to a potential turn in the U.S. credit cycle.
• Our study finds that a small number of Asia-Pacific REITs would face rating pressure under three stress scenarios of interest rates spiking by 100 bps, 200 bps, and 300 bps.
• Further, our stress tests on Asia-Pacific REITs' asset bases found that their currently elevated asset values mask their potentially higher gearing levels. However, gearing ratios remain within rating tolerances under the stress tests.

U.S. REITs Look Ready To Handle Rising Rates, Sept. 24, 2018

• Healthy balance sheets enjoyed by most U.S. REITs we rate will allow these borrowers to withstand a gradual pace of rate increases with little effect on their credit quality.
• We believe most U.S. REITs we rate can absorb this gradual increase in rates, given their balance sheets hold a limited amount of floating-rate debt and have limited near-term refinancing needs.
• While rising interest rates have the potential to weaken credit protection measures, particularly EBITDA interest coverage and fixed-charge coverage ratios, this risk is mitigated because our rated REIT universe consists largely of fixed-rate debt. Less than 20% of REITs we rate have debt structures with more than 25% exposure to variable-rate debt.
• Meanwhile, aggregate debt maturities are manageable, in our view. Just 3% of outstanding debt comes due during the remainder of this year, followed by 7% and 11% in 2019 and 2020, respectively.

How Would The Credit Quality Of European REITs Withstand Rising Interest Rates?, Sept. 24, 2018

• With a special focus on the 25 largest real estate names that we rate in Europe, we ran stress scenarios incorporating higher floating rates over the next three years to gauge the impact on debt-servicing capacity.
• The direct impact on funding costs and interest expense coverage ratios appears limited and unlikely to be the sole trigger of negative rating actions; most REITs have fixed or hedged their debt for the next three to four years.
• A more significant side effect is likely to be on asset valuations: Limited increases in interest rates, if unaccompanied by higher inflation, would depress asset values.
• To gauge how lower asset values could affect rated European REITs' asset-based credit metrics, we ran a second round of stress scenarios, incorporating arbitrary drops in portfolio value over the next two years.
• Across our sample, a 5% drop in portfolio value is unlikely to trigger rating actions; a 10% fall is likely to cause at least a few outlook changes and only a handful of downgrades; a 20% drop could trigger downgrades for several companies. We consider double-digit drops in values as ratings remote though.

Sovereigns

Do Not Push The Panic Button On Emerging Market Sovereigns, Oct. 9, 2018

• Recent increases in global interest rates, followed by market turmoil, have raised concerns about potential liquidity problems spreading across emerging market sovereigns.
• We do not think credit problems will spread to the emerging market asset class as a whole.
• A large number of emerging market countries have undertaken reforms over past decades to strengthen their creditworthiness, improving their economic structure and reducing their vulnerability to a potential drop in global liquidity. We expect our sovereign ratings on those countries to be relatively stable over periods of stress.
• An exclusive focus on external imbalances and debt burdens may provide a misleading picture of future credit developments in this asset class.

Structured Finance

CLO Spotlight: To 'B-' Or Not To 'B-'? A CLO Scenario Analysis In Three Acts, Nov. 26, 2019

• Exposure to loans from 'B-' rated obligors has reached a record level, constituting nearly 19% of U.S. broadly syndicated loan (BSL) CLO transaction collateral pools. This reflects the trends playing out in the overall U.S. corporate loan market.
• The increase in loans from 'B-' rated obligors has drawn the market's attention, as ratings on these companies can be volatile. Even in relatively benign credit environments, about 10% of 'B-' rated issuers, on average, experience downgrades.
• In an effort to shed some light on the potential impact of downgrades and defaults within the cohort of 'B-' rated obligors on rated U.S. BSL CLOs, we created three scenarios of increasing severity, based on broad hypothetical outcomes. These scenarios are not meant to be predictive or part of any outlook statement, nor are they meant to reflect any of the stresses outlined in our rating definitions; they are specifically geared to address the questions and concerns voiced to us from CLO market participants.

How Would Global Structured Finance Fare In A Downturn?, Sept. 4, 2019

• S&P Global Ratings undertook a stress test to estimate the impact of a potential market downturn on structured finance ratings. Under our simulation, U.S. growth stumbles as previous fiscal stimulus measures expire. A U.S. recession undercuts world growth and a confidence shock spreads across the globe via slower trade and weak commodity markets.
• Under this scenario, we believe that downgrade and default risks for most structured finance sectors and regions would be contained to speculative-grade classes, albeit with some risk in low investment-grade (e.g., 'BBB') credits. We generally expect performance to remain within our rating definitions. Still, there are certain sectors and regions which merit a closer look, including U.S. and European CLOs, U.S. subprime auto ABS, and CMBS. Sovereign downgrades could also put pressure on some ratings in the European periphery.
• We attribute the reduced severity of potential rating actions and the lower number of potential defaults compared to those which occurred during the 2007-2009 crisis to our less severe stress scenario, as well as to criteria recalibration and enhancements that we made after the crisis.