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Credit Trends: Grocery Chains Lead Potential Fallen Angels In Europe

Credit Trends: Grocery Chains Lead Potential Fallen Angels In Europe

The global tally of potential fallen angels (issuers rated 'BBB-' by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications) remained at 40 in July. Utilities lead with 10 potential fallen angels, followed by consumer products and the retail and restaurants sector with four each (see chart 1). All four potential fallen angels from the retail and restaurants sector are based in Europe, with one each from the U.K. (Marks & Spencer PLC), France (Auchan Holding), Germany (Metro AG), and Italy (Esselunga SpA). Three of these are grocery chains, which lead potential fallen angels in Europe.

Chart 1


Downgrades Reach A Year-To-Date High In European Retail

As of July 8, 2019, the percentage of retail downgrades in Europe (among all global retail downgrades) is 35%, only one percentage point away from an all-time high for the year to date (see chart 2). The European retail and restaurants sector has seen nine downgrades so far in 2019, the all-time highest year-to-date tally for the sector. Meanwhile, the investment-grade negative bias (the proportion of issuers rated 'BBB-' or higher with negative outlooks or ratings on CreditWatch with negative implications) in the sector is elevated at 40%, indicating heightened risk of investment-grade downgrades in the near term (see chart 3).

Even as the euro area economy continued to recover in May from its relative slowdown in the second half of 2018, retail trade in the month fell by 0.3% in Europe (EA19, Eurostat). European food retailers are traditionally more protected from market disruption but face a number of challenges in 2019 as customers progressively move their purchases online or reduce basket sizes and top up their purchases from specialized grocery retailers, resulting in decreasing store traffic and till rolls (see "Industry Top Trends 2019: Retail And Restaurants," Nov. 13, 2018).

Chart 2


Chart 3


Table 1

All Four Retail Potential Fallen Angels Are From Europe
Entity Country Outlook or CreditWatch Sector Debt amount (mil. $)

Auchan Holding

France Negative Retail and restaurants 6,630

Esselunga SpA

Italy Watch Neg Retail and restaurants 1,122

Marks & Spencer PLC

U.K. Negative Retail and restaurants 2,677

Metro AG

Germany Negative Retail and restaurants 2,020
Data as of July 8, 2019. Source: S&P Global Ratings Research.

Fallen Angels Increased In July

This year's global tally of fallen angels (issuers downgraded to speculative grade ['BB+' or lower] from investment grade ['BBB-' or higher]) increased to nine as of July 8, following the downgrade of Austria-based Novomatic AG. S&P Global Ratings lowered the long-term credit rating on Novomatic AG to 'BB+' from 'BBB-', reflecting its view that the effects of the German Gaming Ordinance, along with a tough competitive environment in markets such as Italy and Australia, could cause Novomatic's EBITDA margin to further decline in 2019 (see "Austrian Gaming Operator Novomatic Downgraded To 'BB+/B' On Declining Profitability; Outlook Stable," June 13, 2019).

Table 2

Utilities And The Homebuilders And Real Estate Sector Lead This Year's Fallen Angels Tally With Three Each
Fallen Angels In 2019 To Date
Entity To From Sector Country Rated debt amount (mil. $)

Novomatic AG

BB+ BBB- Media/entertainment Austria 792

TransAlta Corp.

BB+ BBB- Utilities Canada 2,191

Charles River Laboratories International Inc.

BB+ BBB- Health care U.S. 1,250

Red Star Macalline Group Corp. Ltd.

BB+ BBB- Homebuilders/real estate companies China 300

Senior Housing Properties Trust

BB+ BBB- Homebuilders/real estate companies U.S. 2,250

Macquarie Infrastructure Corp.

BB+ BBB- Utilities U.S. 3,854

Magellan Health Services Inc.

BB+ BBB- Insurance U.S. 400

Washington Prime Group Inc.

BB BBB- Homebuilders/real estate companies U.S. 1,893

PG&E Corp.

B BBB- Utilities U.S. 17,525
Data as of July 8, 2019. Source: S&P Global Ratings Research.

Chart 4


For a full list of global fallen angels, please refer to "Global Fallen Angels Since 1995 Total 978," published Aug. 2, 2019.

Related Research

  • German Food Wholesaler Metro AG 'BBB-/A-3' Ratings Put On CreditWatch Negative On Possible Takeover And Higher Debt, July 4, 2019
  • "Volume of retail trade down by 0.3% in euro area; Down by 0.4% in EU28," Eurostat, July 4, 2019
  • Auchan Holding Downgraded To 'BBB-' On Weak Operating Performance And Elevated Leverage; Outlook Negative, March 22, 2019
  • Italian Food Retailer Esselunga On CreditWatch Negative On Likelihood Of Higher Debt, Jan. 15, 2019
  • Marks & Spencer PLC Outlook Revised To Negative On Weak Like-For-Like Sales; Ratings Affirmed, Nov. 20, 2018
  • Industry Top Trends 2019: Retail And Restaurants, Nov. 13, 2018

This report does not constitute a rating action.

Credit Markets Research:Sudeep K Kesh, New York (1) 212-438-7982;
Nicole Serino, New York + 1 (212) 438 1396;
Research Contributor:Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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