(Editor's Note: This research roundup features a curated compilation of the key takeaways from our most up-to-date thought leadership. This edition has been updated from the last roundup on March 6, 2024.)
In this edition of Instant Insights, our key takeaways from recent articles include the following: the latest Credit Cycle Indicator roundup, our consumer goods outlook, our updated oil price assumptions, the European Central Bank's cyber stress test, and the budgetary impact of the Olympics on Paris. We dive into fourth-quarter corporate results, Indian renewables, GCC real estate, Hong Kong's property policy, China's consumer firms, U.K. social housing borrowing, longer-term effects of flooding events on California cities and counties, as well as packaged food companies, not-for-profit acute-care providers, and our military rental housing outlook in the U.S. Related to financial institutions, we cover large Brazilian banks, China banks' TLAC needs, Latin America Financial Institutions Monitor, takeaways from U.K. banks' full year results, small banks in the U.K., U.S. regional banks' quarterly update and CFBP's final rule on credit card late fees. We also feature Norwegian and Finnish covered bond market insights, credit implications of the Kroger-Albertsons merger following FTC complaint, and the leveraged loan market and the auto loan ABS tracker in the U.S.
Key Takeaways
- S&P Global Ratings' forward-looking global and regional Credit Cycle Indicators (CCIs), which tend to lead credit stress and recovery by six to 10 quarters, maintain their upward trajectory toward a credit recovery in 2025. However, headwinds this year could mean a bumpy ride to recovery. Costlier debt, households' reduced propensity to spend, and lenders' risk aversion will strain corporate borrowers' profit margins and liquidity profiles, and exacerbate credit pressures. Risk of stickier-than-anticipated inflation could prompt central banks to keep rates high. A sharp economic slowdown and squeezed disposable income could lead households to pull back on consumption.
- S&P Global Ratings has lowered its Brent and West Texas Intermediate (WTI) oil price assumptions for 2025 and subsequent years. We maintain our WTI and Brent price assumptions of $80 and $85 this year, respectively, noting geopolitical tensions coupled with the Organization of the Petroleum Exporting Countries and its allies (OPEC+) production restraint, supporting oil prices.
- Regarding our outlook for the consumer goods sector, we expect branded consumer product companies' average price increases to level off within the low to mid-single digit range this year. Cost pressures will continue to abate but competition remains intense. Consumer product companies will use gross margin gains to strengthen brand equity through increased advertising and promotional spending. Spillover effects from geopolitical tensions were lower than we expected, but further escalations could increase commodity price volatility and hurt global trade and consumer sentiment.
S&P Global Ratings periodically updates this article, which contains an edited compilation of key takeaways from our most up-to-date thought leadership organized by sector, region/country, and publication date (see table 1).
Table 1
Key Takeaways From Our Most Recent Reports
Credit Conditions
1. Global Credit Outlook 2024: New Risks, New Playbook, Dec. 4, 2023
Alexandra Dimitrijevic, London, + 44 20 7176 3128, alexandra.dimitrijevic@spglobal.com
- Borrowers across all asset classes will need to adjust to tighter financing conditions and softer economic growth. While long-term yields will likely peak around midyear, financing conditions will likely stay tight in real terms in 2024. Borrowers have reduced near-term maturities, but the share of speculative-grade debt coming due rises significantly in 2025, making 2024 a pivotal year. Defaults will likely rise further, to 5% in the U.S. and 3.75% in Europe, above their long-term historical trends.
- We expect additional credit deterioration in 2024, largely at the lower end of the ratings scale, where close to 40% of credits are at risk of downgrades. Sectors exposed to a decline in consumer spending are most vulnerable. Meanwhile, investment-grade credits should generally continue to show resilience despite some margin compression—with the exception of the real estate sector.
- The main risks that could derail our baseline expectations, leading to further credit deterioration, include persistent tight financing conditions amid entrenched inflation; a sharper-than-expected slowdown in global growth; elevated input-cost inflation and high energy prices that squeeze corporate profits and pressure governments' fiscal balances; vulnerable commercial real estate; and amplifying geopolitical tensions.
- Looking ahead, heightened geopolitical risks, the need to accelerate the decarbonization of the economy to address the rise in climate-related risks, and the technology revolution will increasingly shape the future of credit.
2. Credit Conditions Asia-Pacific Q1 2024: India, Southeast Asia Advance As China Slows, Dec. 5, 2023
Eunice Tan, Singapore, +65-6530-6418, eunice.tan@spglobal.com
- Shift in regional growth pattern: We expect Asia-Pacific's growth engine to shift from China to South and Southeast Asia. We project China's GDP growth to slow to 4.6% by 2026 (2023: 5.4%), edge up to 4.8% in 2025, and return to 4.6% in 2026. We forecast India will reach 7.0% in 2026 (2023: 6.4%); Vietnam, 6.8% (4.9%); the Philippines, 6.4% (5.4%); and Indonesia steady at about 5%. This shift could constrain the upside over the next few years for China's issuers while improving those of issuers in India, Vietnam, the Philippines, and Indonesia.
- High rates and inflation: Asia-Pacific's central banks will likely keep interest rates high for longer. The region's borrowers, particularly the highly indebted, could rack up higher interest expenses from financing needs. A widening conflict in the Middle East could threaten global supply chains and hike energy costs, fanning inflation. Amid weak currencies, higher input costs could hurt corporate margins, while weakening demand.
- Spillover risks abound: While Asia-Pacific's economic growth remains broadly resilient, buoyed by robust labor markets and service sectors, the growth momentum is susceptible to risks of energy shocks (e.g., from a widening Middle East conflict) and slower global demand (risk of a U.S. hard landing). We lowered our growth projection for the region (excl. China) to 4.2% in 2024. Prospects for industries also differ, with export-centric manufacturing faring worse. The region's net ratings outlook bias stands at negative 1%.
- Risks to outlook: High risks are: (1) China's property downturn, weak business and consumer confidence, and high debt levels; (2) high interest rates exacerbating the debt-servicing burden of highly leveraged borrowers; (3) a harder-than-expected landing of the global economy, further depressing demand and exports; and (4) borrowers' lack of ability to fully pass on inflated costs to customers. Intensifying geopolitical tensions is an elevated risk. Uncertainty about Japan's monetary policy and additional real estate sector cash flow challenges (beyond current ones) are moderate risks.
3. Credit Conditions Emerging Markets Q1 2024: Not Getting Easier, Nov. 28, 2023
Jose M Perez-Gorozpe, Madrid, +34-914-233-212, jose.perez-gorozpe@spglobal.com
- Credit conditions in emerging markets (EMs) will likely deteriorate in 2024, as major economies slow down (the U.S., China, and the eurozone), the effects of rapid monetary tightening surface, and debt maturities pile up.
- The balance of risks for EM credit conditions remains on the downside, given an extended period of high interest rates, the potential for further inflationary pressures, and weaker-than-expected growth in the largest economies. Debt refinancing will likely complicate the picture, as the global maturity wall is building up with considerable peaks in 2025.
- Credit quality across key EMs will likely be strained as risks unfold.
4. Credit Conditions Europe Q1 2024: Adapting To New Realities, Nov. 28, 2023
Paul Watters, CFA, London, +44-20-7176-3542, paul.watters@spglobal.com
- 2024 looks set to be a year of adaptation to the hangovers from high inflation, high rates, and high debt, against a more uncertain and volatile geopolitical backdrop.
- Geopolitical conflicts spilling over to Europe, a sharp rise in unemployment dragging Europe into recession, and a protracted period of higher rates exposing financial vulnerabilities are the key risks.
5. Credit Conditions North America Q1 2024: A Cluster Of Stresses, Nov. 28, 2023
David Tesher, New York, +1-212-438-2618, david.tesher@spglobal.com
- Credit stresses are growing, and borrowers will need to adjust to a new playing field in which financing conditions could become even tighter. The costs of debt service and/or refinancing could be overly burdensome, especially for lower-rated borrowers.
- Other high risks include the chance of recession in the U.S. and persistent cost pressures.
- The net outlook bias for North American corporates was negative 10.3% as of Nov. 15. We expect the U.S. trailing-12-month speculative-grade corporate default rate to reach 5% by September.
- A supplementary slide deck is available here.
Auto
6. Tougher Pricing Conditions In 2024 Could Cramp U.S. Auto Sector Ratings Headroom, Feb. 12, 2024
Nishit K Madlani, New York, + 1 (212) 438 4070, nishit.madlani@spglobal.com
- High interest rates will weigh on consumer purchasing power and limit U.S. auto sales growth through 2026.
- We expect modest credit deterioration in the auto sector, particularly for some lower-rated auto suppliers.
- Production discipline and strong pent-up demand from fleet operators led to stronger-than-expected pricing in 2023, but we expect about a 10% decline through 2025.
- Rising inventories for several electric vehicles (EVs) and plug-in hybrids indicate slowing demand.
Chemicals
7. Credit FAQ: Why The Recovery May Be Moderate For Asia-Pacific Agrochemicals, March 5, 2024
Betty Huang, Hong Kong, (852) 2533-3526, betty.huang@spglobal.com
- The Asia-Pacific agrochemicals sector looks set to gradually recuperate in 2024. This will be underpinned by the inelastic, improving demand and moderating inventory levels globally.
- S&P Global Ratings believes any recovery in profitability could be moderate, following a tough comedown in 2023 from the 2022 peak. This is because some major challenges remain, i.e. significant supply surplus, primarily from China, and an uncertain pace of restocking in a volatile market environment.
Consumer products
8. China Consumer Versus Global Peers: Similar Ratings, Different Stories, March 6, 2024
Flora Chang, Hong Kong, + 852 2533 3545, flora.chang@spglobal.com
- China's rated consumer firms generally have lower leverage relative to global leaders.
- However, the China sector tends to have higher geographical, brand, and product concentration.
- As growth in China slows, consumer-sector strategies could broaden. A comparison with selected global peers may provide some insight into future trajectories.
9. Consumer Goods 2024 Outlook: Carryover pricing supports margins, volumes stay subdued, March 11, 2024
Raam Ratnam, CFA, CPA, London, +44 7789 65 0807, raam.ratnam@spglobal.com
- Branded consumer goods companies' average annualized price increases will level off within the low to mid-single digit range.
- Input and operating costs will continue to moderate. Together with carryover price increases, this will improve profitability in 2024.
- Mature markets will face volume compression as consumers look for value and cheaper private-label alternatives.
- Competition remains intense. Consumer product companies will use gross margin gains to strengthen brand equity through increased advertising and promotional spending.
- Negative bias is concentrated on lower-rated companies, predominantly in the U.S., where the ratings outlook on about 34% of rated companies is negative.
- Spillover effects from geopolitical tensions were lower than we expected but further escalations could increase commodity price volatility and supply chain costs, as well as hurt global trade and consumer sentiment.
10. U.S. Packaged Food Companies Seek More-Normal Trends In 2024, Though A Delayed Volume Recovery Weighs On The Industry's Outlook, March 11, 2024
Bea Y Chiem, San Francisco, + 1 (415) 371 5070, bea.chiem@spglobal.com
- Consumers are stretched by grocery prices that are on average 25% higher than they were a few years ago. They are seeking value, increasing their shopping frequency, and purchasing smaller baskets.
- Despite our expectation for weak revenue growth in the packaged food sector in 2024, we expect stable ratings for investment-grade issuers, absent large mergers and acquisitions (M&A). Speculative-grade issuers will face more downside risks, especially those with upcoming debt maturities.
- Revenue growth will be minimal for the industry in 2024. Volume growth remains elusive, and price increases will be less beneficial.
- We expect margins to modestly improve with moderating input costs, which will be partially offset by increased advertising and promotional expenditures.
- M&A activity will be opportunistic and mainly for investment-grade issuers.
11. CAGNY 2024: Shaq, Dolly, And Lots Of Sweet Treats In the Consumer Space, Feb. 27, 2024
Gerald T Phelan, CFA, Chicago, + 1 (312) 233 7031, gerald.phelan@spglobal.com
- More normal macroeconomic and industry conditions.
- Materially higher media spending.
- Efficiencies across the P&L via increased use of digital, artificial intelligence (AI), and shared services.
- Continued modest pricing actions, despite pressure from retailers and consumers.
- M&A primarily bolt-on in nature.
- Little in-depth discussion of potential GLP-1 disruptions.
Containers and packaging
12. EMEA Forest And Paper Products And Packaging Investment-Grade Portfolio: How Credit Stories Have Evolved, Feb. 21, 2024
Desiree Menjivar, London, + 44 20 7176 7822, desiree.menjivar@spglobal.com
- Forest and paper product producers: The COVID-19 pandemic spurred demand for packaging paper and labels (due to the rise in ecommerce) but accelerated the decline in demand for graphic paper (as fewer people worked from the office). This, along with good demand for tissue, also supported demand for pulp. In 2022, the paper and packaging sector benefitted from exceptional price increases, which in many instances exceeded cost increases. The sharp rise in energy costs in 2022 had a limited effect on most paper producers, given their vertical integration into energy production. Strong performances in 2022 supported positive rating actions on several issuers in 2023. Since then, the industry has experienced weaker demand and destocking, even if credit metrics remain by and large above pre-COVID levels. Despite this, the outlook for all our investment-grade issuers in the sector in EMEA is stable.
- Containers and packaging producers: Overall, the pandemic had a limited effect on our large beverage packaging producers. Demand for liquid packaging remained stable, demand for food jars increased, while demand for 'on premise' items (spirits and wine) decreased. Demand was strong for paper packaging producers due to the rise in e-commerce. We saw weaker demand for beverage packaging products in 2023 due to weaker consumer confidence, changing consumer habits, and destocking. We expect a similar trend for 2024.
- Our rating actions were primarily driven by strong performances in 2022, coupled with the completion of large investment cycles (which will expand the revenue base and improve cash generation), as well as changes in ownership (such as a material reduction in financial sponsor influence) and changes in financial policy (commitment to an investment-grade rating).
- The ratings on our forest and paper product issuers are all constrained (-1 notch) by their financial policies, which allow for additional leverage. The additional margin under the issuers' financial policy allows them to make additional debt-funded expansionary investments or shareholder returns.
Corporates
13. Corporate Australia Eyes A Soft Landing, March 5, 2024
Paul R Draffin, Melbourne, + 61 3 9631 2122, paul.draffin@spglobal.com
- REITs remain under credit pressure. Deleveraging options may improve later this year.
- Cost of living will continue to weigh on consumers, squeezing margins and driving further cost cuts.
- Commodity prices are diverging, with new minerals suffering from appreciable demand/supply imbalances.
- Our rating outlooks are mostly stable, with a negative rating bias most evident in the office REIT and postal sectors.
14. Corporate Results Roundup Q4 2023: Earnings show signs of stabilizing, March 7, 2024
Gareth Williams, London, + 44 20 7176 7226, gareth.williams@spglobal.com
- The global Q4 2023 results season for rated nonfinancial corporates is 68% complete, with 73% of results in for investment-grade (IG) and 62% for speculative-grade (SG). North America is near the finish with 89% of companies having reported and making up 63% of the global count. European results are coming in quickly with 60% complete now and Asia-Pacific (APAC) nearing the half-way stage at 47% complete. Comments reflect results to date.
- Earnings are showing signs of stabilizing. Measured at an annual rate, revenues are near flat (-0.7%) and EBITDA is down 3.3%, a little less than in Q3 (-3.9%). Revenues are down 0.1% versus the same quarter a year ago, while EBITDA is up 0.2%. Assuming the soft- or no-landing arrives, the earnings recession has been modest by historical standards.
- Signs of an upturn are clearer if the volatile commodity sectors are excluded. On that basis, revenues are up 2.8% on an annual basis (Q3 +3.0%) and EBITDA growth has turned positive (+2.0% vs -0.7% in Q3).
- Europe is struggling, with growth weaker and the surprise balance negative for both revenues and EBITDA, in contrast to North America where the same balance is positive and improving. Annual growth has turned positive in Latin America, and the large downturn in APAC earnings appears close to ending.
- Regional differences are also apparent in our transcript and investor presentation sentiment analysis. Amidst a global improvement, median net positivity scores are highest for North American companies. Nearly all North American industries have net positive sentiment; in Europe, roughly half are negative.
- Industry growth trends continue to show strength from consumer cyclicals and relative weakness for industrial cyclicals, reflecting the resilience of U.S. consumers in particular.
- Pressures and risks are still apparent. Cash interest payments are still surging, interest coverage continues to fall, and capital expenditure growth is slowing. A third of sectors have seen margins fall annually.
15. U.S. Corporate Credit Outlook 2024: A Bumpy Ride To A Soft Landing, Jan. 29, 2024
David Tesher, New York, +1-212-438-2618, david.tesher@spglobal.com
- While U.S. corporate earnings will likely improve modestly, we expect further credit deterioration, particularly at the lower end of the ratings scale. Borrowing costs look set to remain elevated and weigh on corporates' ability to service debt and refinance.
- Telecom, health care, chemicals, consumer products, and retail and restaurants have the highest net negative bias, suggesting a gloomier ratings outlook. The commercial office sector is also under intense pressure.
- The U.S. will likely avoid a near-term recession and settle into a "soft landing", but recession risks remain. Labor cost pressure and supply chain constraints could linger.
Credit trends and market liquidity
16. Default, Transition, and Recovery: European Speculative-Grade Default Rate To Stabilize At 3.5% By December 2024, Feb. 16, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- We expect the European trailing-12-month speculative-grade corporate default rate to be 3.5% by December 2024, the same level as in December 2023, indicating a relative stabilization of the default rate by year-end after its expected rise to slightly higher levels over the summer.
- A prolonged growth slowdown (or recession), particularly if triggered by any meaningful deterioration in regional conflicts spilling over to Europe, could push the default rate higher--to 5% in our pessimistic case.
- Higher interest rate burdens still lie ahead for many businesses and households despite recent market optimism and a fall in fixed-rate yields. Upcoming fixed-rate maturities this year and next will force issuers to contend with market rates still roughly 2% higher than those on existing debt.
- We think that similar to 2023, consumer-reliant sectors such as consumer products and media and entertainment will likely lead the default tally in 2024. The chemicals and health care sectors may also see high relative defaults because these sectors have many issuers with negative cash flow and high proportions of 'CCC/CC' ratings.
17. This Month In Credit: Rising Market Tides Aren’t Lifting All Boats, Feb. 29, 2024
Evan Gunter, Montgomery, +1-212-438-6412, evan.gunter@spglobal.com
- Speculative-grade issuers are broadly benefiting from rebounding issuance and tightening credit spreads, but some weaker credits continue to struggle.
- The number of weakest links declined in January, resulting more from credit deterioration (defaults) than meaningful credit improvement.
- Leverage pressures may be receding--lower leverage was a factor in nearly twice as many new potential upgrades in January than in December.
- Higher-rated rating trends continue to be more favorable, with three rising stars newly upgraded to investment-grade from speculative-grade, including NASCAR Holdings LLC, while there were no fallen angels or new potential fallen angels.
18. Default, Transition, and Recovery: U.S. Speculative-Grade Corporate Default Rate To Hit 4.75% By December 2024 After Third-Quarter Peak, Feb. 15, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- Given positive momentum with GDP, inflation, and interest rates in 2024, we expect defaults to decline in the fourth quarter but finish the year higher than 2023. This should push the U.S. trailing-12-month speculative-grade corporate default rate to 4.75% (80 defaults) by December 2024.
- This reflects a slight decline in defaults from our previous 5% projection through September. The proportion of 'CCC/C' ratings remains elevated, and we expect these firms to contend with weak cash flow and elevated interest expenses this year.
- We expect defaults in 2024 to largely come from consumer-facing sectors, such as consumer products and media and entertainment, as well as the still highly leveraged health care sector. Distressed exchanges will likely remain common as well.
- Any downside surprise to the currently optimistic backdrop could push the default rate toward our pessimistic case of 6.75%; however, at this time a recession is looking less likely in 2024.
Cross-sector
19. Credit Cycle Indicator Q2 2024: Upward Momentum For A Recovery In 2025, March 11, 2024
Vincent R Conti, Singapore, + 65 6216 1188, vincent.conti@spglobal.com
- Our forward-looking global and regional Credit Cycle Indicators (CCIs), which tend to lead credit stress and recovery by six to 10 quarters, maintain their upward trajectory toward a credit recovery in 2025.
- However, headwinds in 2024 could mean a bumpy ride to recovery. Costlier debt, households' reduced propensity to spend, and lenders' risk aversion will strain corporate borrowers' profit margins and liquidity profiles, and exacerbate credit pressures.
- Risk of stickier than anticipated inflation could prompt central banks to keep rates high. A sharp economic slowdown and squeezed disposable income could lead households to pull back on consumption.
20. Global Debt Leverage: Global Debt 2030: Can The World Afford A Multifaceted Transition?, Jan. 10, 2024
Terence Chan, CFA, Melbourne, + 61 3 9631 2174, terry.chan@spglobal.com
- Global leverage trending up and structurally higher interest rates will increase the financing bill for governments, corporates, and households.
- Additional investments will be necessary to address climate-related risks, the energy transition, digital transformation, and an aging population, with developing economies disproportionately affected.
- International collaboration and a combination of public and private capital will be required to make the transition affordable globally, but increasing geopolitical fragmentation will make this more difficult.
21. GCC Corporate And Infrastructure Outlook 2024: Holding Up Against Refinancing Needs, March 4, 2024
Rawan Oueidat, CFA, Dubai, + 971(0)43727196, rawan.oueidat@spglobal.com
- Most Gulf Cooperation Council (GCC) corporate and infrastructure ratings should remain resilient to the soft global economic growth and high interest rates in 2024.
- We expect continued growth in both EBITDA and capital expenditure (capex) overall, largely reflecting rated companies' ambitious economic development plans. Their credit metrics should therefore either remain broadly unchanged, or improve marginally.
- We believe that refinancing risk is largely manageable for our rated portfolio, since 75%-80% of the debt maturing in 2024 sits at highly rated government-related entities (GREs).
- In infrastructure, we anticipate an acceleration in the implementation of various decarbonization initiatives following COP28, alongside issuers' progressive return to the capital markets for debt refinancing.
- High geopolitical risk in the region poses a risk to companies that depend on investor confidence.
Economics
22. Asian Emerging Market Currencies Will Chart A Comeback, Feb. 27, 2024
Louis Kuijs, Hong Kong, +852 9319 7500, louis.kuijs@spglobal.com
- Following a decade of sizable real depreciation against the U.S. dollar, Asian emerging market (EM) currencies are now cheap enough to suggest potential for long-term appreciation.
- The low valuations and prospects for continued economic catch up should help the currencies strengthen in real terms against the U.S. dollar, with nominal appreciation probably playing a crucial role.
- Our benchmarks suggest much larger room for appreciation for some Asian EM currencies than for others; currency prospects also differ for developed economies.
23. Global Macro Update: 2024 Is All About The Landing, Nov. 29, 2023
Paul F Gruenwald, New York, + 1 (212) 437 1710, paul.gruenwald@spglobal.com
- Following a synchronized rise in policy rates, growth is now unsynchronized across major economies. The U.S. is outperforming whereas in Europe activity is flat. The common macro thread comprises strong labor markets and spending on services, fiscal tailwinds, and lingering core price pressures.
- Inflation has likely peaked as have policy rates, but central banks are on guard against declaring victory too early. Our higher-for-longer view applies both to policy rates and market interest rates, real and nominal. Caution among developed market central banks is constraining potential rate cuts in emerging markets.
- We have moved our GDP growth forecasts marginally higher in some key emerging markets but are broadly unchanged elsewhere. We have again pushed any necessary slowdowns into the future.
- The next macro challenge is to "stick the landing." The risks to our soft-landing baseline look balanced. Strong labor markets and fiscal tailwinds are driving the upside, whereas uncertainties about the lagged transmission of cumulative rate hikes since early 2022 are driving the downside.
24. Economic Research: The U.S. Economy Bucks The Global Trend, Feb. 28, 2024
Paul F Gruenwald, New York, + 1 (212) 437 1710, paul.gruenwald@spglobal.com
- The U.S. economy continues to outperform peers--it was the only major advanced economy where growth rose in 2023 despite the steep increase in policy rates (so Japan is excluded).
- In our assessment, the strong relative performance of the U.S. reflects a combination of resilience (flexibility and productivity), fiscal policy (loose), lags (monetary transmission), and luck (geography).
- U.S. growth should eventually slow as monetary policy tightening bites, but some degree of exceptionalism suggests relative outperformance will continue. This would require that recent gains in productivity are sustained.
25. U.S. Economic Forecast Update: A Sturdy Job Market Keeps Growth Going, Feb. 22, 2024
Satyam Panday, San Francisco, + 1 (212) 438 6009, satyam.panday@spglobal.com
- We now expect U.S. real GDP growth of 2.4% in 2024 as the labor market remains sturdy. This is up from our previous forecast of 1.5% (published last November), and it's only slightly below the estimated 2.5% growth that the U.S. saw in 2023.
- Inflation will likely cool further in coming months, despite the uneven disinflationary process so far.
- We have not changed our 2024 outlook for monetary policy. We believe the Federal Reserve will cut its policy rate by 25 basis points at its June meeting, with cuts totaling 75 basis points by year-end.
Environmental, social and governance
26. Sustainability Insights: As The European Apparel Sector's Environmental Footprint Widens, Credit Risks Are Low, For Now, Feb. 29, 2024
Mickael Vidal, Paris, + 33 14 420 6658, mickael.vidal@spglobal.com
- Although the volume of clothes produced and sold globally is increasing alongside its environmental impact, the apparel sector's carbon emissions, waste, and pollution risks remain largely unpriced.
- At the same time, the financial impact of environmental risks on the sector and our ratings has so far been negligible, reflecting a lack of stringent environmental regulations and little change in consumers' buying behavior.
- We believe value- and fast-fashion retailers--whose earnings are mostly led by volumes--could become more exposed to these increasing risks than luxury brands.
27. Sustainability Insights | Research: Latin American Sustainable Bond Issuance To Rise In 2024, Feb. 27, 2024
Rafael Janequine, São Paulo, + 551130399786, rafael.janequine@spglobal.com
- We estimate GSSSB issuance in Latin America will reach $45 billion–$55 billion in 2024, with Brazil, Chile, and Mexico likely remaining the market leaders, particularly through issuance of sustainability and sustainability-linked bonds (SLBs).
- Developing local guidance and taxonomies for sustainable financing are likely to continue to foster standardization and transparency, fueling investor appetite and encouraging new issuers to enter the region's GSSSB market.
- SLBs remain relatively more prevalent in Latin America than in any other region; we expect to see an increase in the number of social performance indicators in new SLBs, given the region's socioeconomic development needs.
28. Sustainability Insights: TSMC And Water: A Case Study Of How Climate Is Becoming A Credit-Risk Factor, Feb. 26, 2024
HINS LI, Hong Kong, + 852 2533 3587, hins.li@spglobal.com
- We view water scarcity as a risk in the coming decade for the tech hardware industry, particularly the water-intensive semiconductor subsector. Mishandling of such a risk could hit a chipmaker's operations and creditworthiness.
- We look at the sector leader TSMC's risk exposure to water supply as a case study. We believe water shortage will not have a meaningful effect on the foundry's operations and credit profile within the next three years.
- However, poor execution of water supply management could cause TSMC's output to drop as much as 10% from our forecast for 2030, possibly harming its reputation, client relationships, and market share.
- Given TSMC's dominance in advanced chipmaking, potential water-related disruptions to operations could disrupt the global tech supply chain.
Financial institutions
29. Islamic Banking In Central Asia Remains Nascent, Feb. 27, 2024
Roman Rybalkin, CFA, Dubai, +971 (0) 50 106 1739, roman.rybalkin@spglobal.com
- Islamic Banking is growing from a small base in Central Asian countries with financings of about $500 million as of Sept. 30, 2023.
- While banking regulations seem supportive, there is work to do on the tax and accounting sides.
- The key determinant of success is product quality and its economic added value.
30. Asia-Pacific Banking Country Snapshots: Property Exposures Will Test Ratings In 2024, Feb. 28, 2024
Gavin Gunning, Melbourne, + 61 3 9631 2092, gavin.gunning@spglobal.com
- We continue to monitor downside risks, particularly property-related, arising from China and Vietnam. Nonbanks in Korea could also face challenges from real estate project financing.
- Our outlook for the Asia-Pacific banking sector remains steady with 83% of banks on stable outlook as of Jan. 24, 2024.
- Buffers include generally sound profitability and capitalization prospects.
31. Large Brazilian Banks' Performance Varied In Stormy 2023, March 6, 2024
Henrique Sznirer, CFA, Sao Paulo, + 55 11 3039 9723, henrique.sznirer@spglobal.com
- High credit losses in Brazil due to tough economic conditions--specifically, persistently high interest rates and inflation--have materially weakened the payment capacity of small and midsize enterprises (SME) and individuals since 2022.
- Lines such as credit cards, SME loans, and personal loans had rising nonperforming loan (NPL) levels between 2022 and 2023. However, the impact was not the same across the largest Brazilian private banks because of portfolio mix, average obligor profile, and ability to navigate the spike in delinquency.
- We expect 2024 to be somewhat better for banks, but fierce competition and challenges for the SMEs' portfolio should continue to strain profitability. However, we do not expect this to result in negative rating actions for Brazilian banks, as we believe that losses will remain manageable.
32. Realigned Capital Rules To Cut China Banks' TLAC Needs, March 7, 2024
Xi Cheng, Shanghai, + 852 2533 3582, xi.cheng@spglobal.com
- China's closer alignment to Basel III capital rules in calculating risk-weighted assets may drive down the TLAC capital needs of its biggest lenders.
- The country's new capital rules are more risk-sensitive and allow more capital saving by banks adopting the internal ratings-based model.
- China's likely inclusion by year end of the deposit insurance fund in TLAC capital will also likely help institutions reduce their TLAC capital needs.
33. Supervising Cyber: How The ECB Stress Test Will Shape The Agenda, March 6, 2024
Benjamin Heinrich, CFA, FRM, Frankfurt, + 49 693 399 9167, benjamin.heinrich@spglobal.com
- The European Central Bank's 2024 cyber stress test will assess how 109 of the banks it supervises respond to and recover from a cyberattack.
- Despite limited disclosure around the test's underlying methodology, we view it as a positive step toward developing supervision of this key risk for European banks.
- Like previous U.K. and Israeli cyber stress tests, there will be no "pass or fail" for individual banks, though we expect supervisors will use findings in their daily supervision. Banks that emerge as negative outliers could face elevated investment needs to address identified shortcomings, though we don't expect any immediate ratings impact.
34. Your Three Minutes In Fintech: Social Media Could Catalyze Bank Runs, Feb. 29, 2024
Cihan Duran, CFA, Frankfurt, + 49 69 3399 9177, cihan.duran@spglobal.com
- Banks should monitor social media as part of their liquidity risk management.
- Digital chatter has the potential to accelerate deposit outflows at structurally weak lenders and has been a factor in some recent bank failures, most notably the March 2023 collapse of Silicon Valley Bank.
- S&P Global Ratings believes social media is unlikely to be the sole driver of a bank run, but with about five billion users and an ability to rapidly distribute (sometimes false) information, its potential to stress liquidity buffers shouldn't be ignored.
35. LatAm Financial Institutions Monitor Q1 2024: Fragile Asset Quality Stabilization Amid Sluggish Economic Recovery, March 6, 2024
Cynthia Cohen Freue, Buenos Aires, + 54 11 4891 2161, cynthia.cohenfreue@spglobal.com
- S&P Global Ratings expects Latin American (LatAm) banks' asset quality to continue stabilizing in 2024 and only improve slightly in 2025.
- Credit growth will continue to be at single digits as banks will maintain their stringent underwriting practices, given the tepid pace of the asset-quality recovery.
- Profitability will remain robust, but decreasing interest rates will pressure net interest margins (NIMs).
- International issuances among LatAm financial institutions have picked up, reflecting increasing demand from global capital markets.
- Commercial real estate (CRE) is a key concern for financial institutions across the globe, but LatAm banks have low exposure to this segment.
36. The Fed Pivot Will Change Dynamics For Singapore Banks, March 5, 2024
Ivan Tan, Singapore, + 65 6239 6335, ivan.tan@spglobal.com
- Singapore banks will see thinner interest margins, but higher loan growth later this year.
- Sound fundamentals have shielded the banks from asset-quality deterioration associated with high interest rates.
- Final Basel III touches will further bolster capital, which could drive active capital management for banks to optimize efficiency.
37. Six Takeaways From U.K. Banks' Full-Year 2023 Results, March 6, 2024
William Edwards, London, + 44 20 7176 3359, william.edwards@spglobal.com
- U.K. banks' results were strong for full-year 2023, though the second half marked a slow down as interest rates reached a cyclical peak.
- Even though deposit migration was a universal experience for the sector, its impact was uneven, with some rated banks seeing faster margin compression than others.
- A rapid tightening of margins through the second half of the year came alongside benign asset quality, with nonperforming loans rising only gently from the floor, and disciplined cost control, even in the face of steep inflation. This combination was a boon to 2023 earnings.
38. U.K. Proposal Would Unlock Resolution Funding For Small Banks, March 5, 2024
Richard Barnes, London, + 44 20 7176 7227, richard.barnes@spglobal.com
- The U.K. government proposes that the country's deposit guarantee scheme should fund the recapitalization of certain smaller banks in the event of failure.
- The consultation is partly a response to the March 2023 failure of Silicon Valley Bank's U.K. subsidiary, which was managed effectively but revealed certain gaps in the resolution regime.
- The proposal is similar to elements of the EU's crisis management and deposit insurance framework.
- We see no direct rating implications from the proposal because it does not envisage banks bolstering their loss-absorbing buffers.
39. Tech Disruption In Retail Banking: Heavy Digital Investment Helps U.K. Banks Fend Off Competition, March 4, 2024
Joe Hudson, London, +44 2071766743, joe.hudson@spglobal.com
- U.K. banking customers are increasingly going digital, and banks are responding with strong tech investment enabled by solid earnings.
- As a result, the U.K. banking system is digitally advanced, with sector competition and strong investment propelling technological development.
- Proactive regulators, access to capital for emerging fintechs, and deep pools of tech talent continue to fuel the financial system's digitalization and innovation.
40. CFBP's Final Rule On Credit Card Late Fees Could Hurt Card Issuer Earnings But Will Be Manageable For Most, March 8, 2024
Michal Selbka, New York, +1 212 438 0470, michal.selbka@spglobal.com
- The final rule issued by the Consumer Financial Protection Bureau (CFPB) to cap credit card late payment fees at $8 will hurt earnings at credit card issuers that rely more on nonprime customers.
- The most exposed banks could lose up to 25% of ongoing revenue in the short run, although the impact is more manageable for the largest most diversified card issuers.
- S&P Global Ratings will monitor the effectiveness of banks' plans to mitigate and restore lost revenue, and the potential for changes to business models in the future.
41. U.S. Regional Banks 4Q 2023 Update: Regional Banks Fortify Balance Sheets As Challenging Operating Conditions Persist, March 7, 2024
Devi Aurora, New York, +1 (212) 438 3055, devi.aurora@spglobal.com
- U.S. regional banks reported lower earnings in fourth-quarter 2023 than the prior year's fourth quarter, hurt by lower net interest income (NII), higher loan provisions, and elevated noninterest expenses.
- As a result, regional banks had a return on average equity (ROAE) of 7.3% at the median in Q4 2023, down sharply from 13.9% in the prior year's Q4 and down from 11.2% in Q3 2023.
- Net interest margin (NIM) was flat sequentially in Q4 2023 at 3.1% (at the median) as deposit betas roughly kept pace with loan betas. However, NIM contracted by 31 basis points (bps) year-over-year in Q4 at the median, as deposit betas accelerated in 2023.
- Loans were down in Q4 2023 with a 0.3% sequential decline due to weaker loan demand (especially in CRE), macroeconomic concerns, and capital and funding considerations.
- Asset quality metrics deteriorated modestly amid economic pressures and elevated, though slowing, inflation. However, we expect further gradual deterioration over the next two years.
- Capital ratios increased modestly in Q4 due to somewhat lower capital returns and a decline in loans.
- Funding and liquidity metrics were roughly stable given slowing loan growth and relatively stable deposits as interest rates paused their ascent in the second half of 2023.
Infrastructure
42. Indian Renewables: A Deep Dive Into Operating Performance, March 7, 2024
Cheng Jia Ong, Singapore, +65-6239-6302, chengjia.ong@spglobal.com
- We expect wind power projects to record better volumes in fiscal 2024 as is reflected in all-India level load factors. 2H 2023 (calendar year) wind load factor was 20% higher year-on-year, reflecting some recovery.
- Renewable power generation recovered in fiscal 2023 but remained short of P90 estimate at the portfolio level. P90 underperformance reduced to 0.5% in fiscal 2023 from 1%-2% over fiscals 2021-2022.
- Poor wind performance is often cited as a key driver for P90 misses. Wind portfolio only achieved P90 once over the last eight years. Higher underperformance in the states of Andhra Pradesh, Karnataka, and Maharashtra.
- Persistent P90 misses at portfolio level in India also indicates aggressive resource estimation at the outset. About 70% of projects missed P90 estimates over fiscals 2021-2023, more than levels of 50% in prior years.
- Some players have proactively revised resource estimates considering continuing weaker generation. Robust P90 estimates will lead to a more stable performance and better cash flow predictability.
- Newly commissioned wind assets can benefit from improved technology and higher plant load factor (PLF) of about 35% (80% increase over the past decade).
- Cash collection from state-owned distribution companies has improved across the portfolio driven by the Late Payment Surcharge (LPS) Scheme. On a steady state basis, we expect renewable players to face working capital outflow but at a smaller amount relative to earnings at about 10% of EBITDA (down from 20% previously).
43. Credit FAQ: The Rationale Behind U.S. Utility Securitization And Reasons For Recent Growth, March 4, 2024
Kevin Ryan, New York, +1 2124380565, kevin.ryan2@spglobal.com
- Electric utility companies throughout the U.S. have used securitization as a means to recover various costs.
- Securitization allows utilities to recover sizable costs associated with impactful, and oftentimes unexpected, events upfront through the receipt of cash upon issuance of the bonds. This cash can be used to repay relatively expensive debt and equity financing traditionally used by utilities to initially absorb costs.
Insurance
44. Asia-Pacific Insurance Sector Trends: Returning To Fundamentals As Undercurrents Unfold, March 5, 2024
Craig Bennett, Melbourne, +61 3 9631 2197, craig.bennett@spglobal.com
- Credit trends in the Asia-Pacific insurance sector remain steady, though prospects vary across regions. Of the Asia-Pacific insurers we rate, 98% have a stable outlook.
- With major central banks adjusting monetary policies, capital market volatility may rise. Insurers in Japan and Taiwan face risks of asset and foreign exchange movements, potentially affecting capital buffers.
- As economic growth slows, insurers will focus on investment risk oversight. Credit stresses, particularly in real estate and alternative investments, may lead insurers to reassess the risk-return balances and become more selective.
- As discussions on climate change and sustainable finance heat up, insurers face dual risks in underwriting and investments. Extreme weather events lead to increased claims, impacting earnings for P/C re/insurers, while higher reinsurance costs and growing catastrophe budgets further erode profits.
45. Colombian Insurance Industry To Maintain Profitability In The Coming Years, March 4, 2024
Camilo Andres Perez, Mexico City, + 52 55 5081 4446, camilo.perez@spglobal.com
- S&P Global Ratings expects Colombia's insurance industry to maintain good profits in the next few years, with return on equity of 10%-15%.
- We forecast the industry to grow by 8%-10% in 2024-25, supported by traditional life, health, and property, casualty (P/C) insurance amid fair economic growth.
- We expect investment income to remain key to industry profitability, especially for P/C, where the mandatory third-party auto insurance (SOAT) weighs on results due to its defective underwriting model, regulatory rigidities, and multiple complex sources of risk.
- In our view, the primary risks to the industry are difficulties reforming SOAT and longer-term regulatory uncertainty. We don't currently see much disruption risk associated with insuretech, given the industry's business composition and policyholder preferences.
Oil and gas
46. S&P Global Ratings Revises Its WTI And Brent Price Assumptions For 2025 And Beyond On Anticipated Oversupply, March 11, 2024
Thomas A Watters, New York, + 1 (212) 438 7818, thomas.watters@spglobal.com
- S&P Global Ratings has reviewed its hydrocarbon price deck and has lowered its Brent and West Texas Intermediate (WTI) oil price assumptions for 2025 and subsequent years.
- We maintain our Henry Hub, Canadian Alberta Energy Co. (AECO), and Dutch Title Transfer Facility (TTF) natural gas price assumptions for the remainder of 2024 and beyond.
- We maintain our WTI and Brent price assumptions of $80 and $85 for 2024, respectively, noting geopolitical tensions coupled with the Organization of the Petroleum Exporting Countries and its allies (OPEC+) production restraint, supporting oil prices.
- However, global oil demand will grow at a significantly weaker pace this year, while production from mostly North America will help boost supply despite reductions in output by OPEC+. Given the modest changes to our price deck, we do not anticipate any direct rating actions.
Private markets
47. Secondary Markets: Loans Maintain Gains, March 8, 2024
Jon Palmer, CFA, Austin, +1 212 438 1989, jon.palmer@spglobal.com
- After rising in 2023 and leveling out in February amid higher-for-longer interest rates and increased activity in the primary market, the average bid on all loans remains just below its January high.
- The price trends in February showed market participants are wary of refinancing and liquidity risks, but so far, these risks appear to be offset by growing optimism that the economy will avoid a hard landing.
- The lower end of our sample of first-lien loans is on the rise, with the 10th percentile bid rising to 96.15--its highest level since we started sampling in October 2022.
- The distressed loans' retreat from recent peaks reflects positively on near-term market liquidity.
48. Private Markets Monthly, February 2024: How We Rate Alternative Investment Funds, March 1, 2024
Ruth Yang, New York, (1) 212-438-2722, ruth.yang2@spglobal.com
- As investors increasingly allocate capital across the private debt markets, evolving macro and financial conditions may require a need for greater transparency—especially as alternative investment funds (AIFs) accumulatively turn to credit markets through bond issuance, net asset value (NAV) facilities, capital call facilities, and subscription lines to diversify and optimize funding, as well as focus on credit investment strategies including private loans.
- We apply our global framework for rating AIFs (which we most recently updated in 2021) to various funds whose investment strategies span private and public equity, venture capital, and private debt, as well as hedge funds and other investment companies
Public finance
49. Subnational Debt 2024: Australian States' Debt Rift Deepens, Feb. 29, 2024
Martin J Foo, Melbourne, + 61 3 9631 2016, martin.foo@spglobal.com
- We project gross Australian state government debt will surpass A$600 billion by late 2024 (that's about US$392 billion, or 23% of national GDP).
- COVID-era fiscal stimulus is firmly in the rearview mirror, but states are still borrowing heavily to finance infrastructure investment.
- Gross subnational bond issuance will be almost double that of the sovereign's this year, a dramatic transposition from three years ago.
- Credit quality is stabilizing after downgrades outnumbered upgrades 3:1 over the past three years.
50. Subnational Debt 2024: Canadian Local And Regional Governments Are Running Fast To Stay In Place, Feb. 29, 2024
Bhavini Patel, CFA, Toronto, + 1 (416) 507 2558, bhavini.patel@spglobal.com
- Current macroeconomic hurdles and increased operating spending will thwart the gains made on operating surpluses and Canadian provincial debt levels in fiscal years 2022 and 2023 (ended March 31).
- With improving fiscal performance and a return of operating surpluses, borrowing will primarily fund the refinancing of maturing debt and capital investment.
- In the medium term, higher operating and capital spending of provincial utilities, coupled with hydrological variability affecting revenue performance, could increase provincial borrowing beyond our forecast.
- S&P Global Ratings expects that total provincial and municipal debt will rise by 2.5%-3.0% annually in the next two years, reaching C$1.2 trillion by the end of fiscal 2026.
- Debt issuance will remain bond based, dominated by fixed-rate provincial bonds issued in the domestic market.
51. Same Game, Different Name: China LGFV Issues To Repay The Debt Of A Peer, Feb. 29, 2024
Laura C Li, CFA, Hong Kong, + 852 2533 3583, laura.li@spglobal.com
- The move by a district-level LGFV in Guizhou province to raise debt to address the liquidity issues of another LGFV serves as a temporary solution, at best.
- We believe this model will be hard to replicate broadly, and that it only will serve as a partial and temporary solution for emergency liquidity aid for some distressed LGFVs.
- While it is not a perfect fix for the LGFV's liquidity problems, it is perhaps the best fix given the constraints of time and resources now available.
52. Subnational Debt 2024: Fiscal Policy Differences Influence Borrowing In Developed Markets, March 5, 2024
Linus Bladlund, Stockholm, + 46-8-440-5356, linus.bladlund@spglobal.com
- We expect moderate debt accumulation for local and regional governments (LRGs) across developed markets (DM) through 2024-2025.
- Public investment needs remain elevated in numerous countries, but balanced budget requirements will spur many European LRGs to streamline their capital expenditure plans.
- On the other hand, Australian states and Canadian provinces are not constrained by firm fiscal rules, implying more flexibility to ramp up investment and maintain larger funding gaps.
- Sustainability-themed funding constitutes a small but growing share of outstanding debt as investor demand continues to expand.
53. Subnational Debt 2024: Chinese Governments Reach Their Limits; Other Emerging Markets Taper Borrowing, Feb. 29, 2024
Constanza M Perez Aquino, Buenos Aires, + 54 11 4891 2167, constanza.perez.aquino@spglobal.com
- Driven by China, we project emerging market (EM) subnational borrowing will reach nearly $1.4 trillion in 2024, from the peak in 2023 of $1.5 trillion.
- Chinese local and regional governments' (LRGs) net borrowing has probably peaked but will remain high as it faces mounting macroeconomic pressure, and potential pressure from key state-owned enterprises (SOEs).
- EMs will account for roughly half of total subnational debt stock in 2024, of which 94% is from China and India. We expect this will continue to propel global borrowing volume.
- Outside of China and India, EM borrowers continue to face persistent institutional, market, and macroeconomic barriers to financing growth.
54. Paris' Lean Olympics Are Unlikely To Blow Any Budgets, March 11, 2024
Hugo Soubrier, Paris, +33 1 40 75 25 79, hugo.soubrier@spglobal.com
- With Paris' limited investment needs, the Olympics should weigh less on the public purse than recent games.
- Large private funding and state guarantees have cushioned public sector entities--including the City of Paris and the French government--well against costs.
- Hosting the Olympics remains a logistical challenge for the city, however, notably for the transport network.
55. Subnational Debt 2024 France: Adaptability will remain key amid sluggish growth, March 4, 2024
Stephanie Mery, Paris, + 33 0144207344, stephanie.mery@spglobal.com
- French local and regional governments (LRGs) will continue deleveraging, with debt-to-operating revenue declining to a forecast 72% in 2025, from 77% in 2022. This trend started in 2017 and, despite sizable investment programs, was only temporarily interrupted by the pandemic.
- During 2024-2025, S&P Global Ratings expects French LRGs to limit capex growth as they navigate a weak economic environment and still high, albeit decelerating, inflation.
- LRGs generally favorable debt profile (long average maturity and high share of fixed-rate debt) will mitigate the impact of higher interest rates on interest expenses, which will remain largely below 5% of operating revenues.
- Robust tax revenue growth will continue to support French LRGs' strong budgetary performance, not least due to the large share of value-added tax (VAT) and tax receipts on properties in French LRGs' revenue composition (both slightly above 20% of 2023 expected operating revenues).
- Departments remain the most vulnerable layer of French LRGs due to their exposure to property transfer fees and their high share of social spending as a share of total spending (estimated at above 50%).
56. Subnational Debt 2024 Germany: Subdued fiscal performance suggests borrowing will rebound, Feb. 29, 2024
Michael Stroschein, Frankfurt, +49 (0) 693 399 9251, michael.stroschein@spglobal.com
- German local and regional governments (LRGs) face deteriorating macroeconomic and fiscal environments, which combined with debt regulations that permit only limited deficits could leave LRGs' capital expenditure growth at below inflation.
- We forecast German states and municipalities will borrow €126 billion in 2024. About 45% of that will likely be funded with bonds, which are almost exclusively the preserve of the states, suggesting a material resurgence in annual bond issuance following lows in 2022.
- The effect of recently higher yields on LRGs' interest costs are mitigated by their mostly fixed rate funding and balanced maturities, though significant aggregate debt burdens mean increasing yields are materially relevant to overall budgets.
- German LRGs' revenue and expenditure structure exposes them to certain uncontrollable risks, including inflation of major costs and subdued economic growth that can weigh on shared taxes.
57. Subnational Debt 2024: Global LRGs can handle rising interest expenses, Feb. 29, 2024
Felix Ejgel, London, + 44 20 7176 6780, felix.ejgel@spglobal.com
- We generally see interest expenses putting increasing pressure on the budgets of local and regional governments (LRGs) worldwide. This pressure will only ease if rates decline faster than we expect, or if LRGs reduce their deficits.
- For now, the pressure seems manageable for most LRG sectors worldwide. However, expanding deficits or higher-for-longer rates would quickly ramp the pressure up even further and limit budgetary flexibility, especially where debt stocks are high or debt repricing is fast due to a reliance on variable-rate or relatively short-term debt.
- We see most pressure in countries that need to increase investments materially (like New Zealand, Canada, and Australia), or where LRGs must help sustain economic growth (China).
- Countries that rely on short-term debt (Nordics) or variable-rate debt (Central and Eastern Europe) will see faster repricing and moderate pressure.
- Western Europe seems to have a fair amount of protection thanks to the predominance of long-dated, fixed-rate debt, still benign funding conditions, and moderating deficits. That said, within each LRG sector, meaningful differences between entities affect risk significantly.
- Indian LRGs face a very high interest burden, but we expect their interest ratios to improve slightly thanks to fast revenue expansion. Japanese LRGs should continue to benefit from very low borrowing costs.
58. Subnational Debt 2024: Infrastructure Spending Succumbs To Economic Slowdown, Feb. 29, 2024
Marta Saenz, Madrid, + 34 91 788 7231, marta.saenz@spglobal.com
- We expect global public investments by local and regional governments (LRGs) will broadly stagnate in real terms over 2024-2025 because of weaker global economic growth, higher interest rates, and many LRGs' tighter fiscal policies.
- European LRGs will increase their investments by 2% over 2024-2025, mainly supported by EU funds, rising infrastructure needs, and migration. Latin American LRGs will continue to delay investments, mainly due to limited access to external funding and declining central government transfers.
- Chinese LRGs will reduce capital expenditure (capex) due to a stronger focus on fiscal discipline and weaker economic growth prospects. Australian and Canadian LRGs, on the other hand, will increase capex because of large transportation and health care projects.
- Unlike European and Latin American LRGs, which will continue to finance most of their investments through budgetary resources, Australian and Indian LRGs will rely on borrowing.
59. Subnational Debt 2024: Spain (Debt Absorption Scenarios) All could benefit, with some more than others, March 4, 2024
Alejandro Rodríguez Anglada, Madrid, + 34 91 788 7233, alejandro.rodriguez.anglada@spglobal.com
- Spanish normal-status regions could benefit from the central government absorbing debt.
- This debt relief will be credit positive, but will not be enough to meaningfully improve finances over the next few years.
60. Subnational Debt 2024 Spain: Lower borrowings, but bond issuances recover, Feb. 29, 2024
Marta Sáenz, Madrid, + 34 91 788 7231, marta.saenz@spglobal.com
- We forecast Spanish local and regional governments (LRGs) will have lower financing needs over the next two years, supported by improved budgetary performance metrics and a smoother debt repayment calendar.
- Spanish LRGs' debt burden remains very high in an international context, especially at the regional level. Nevertheless, we expect debt ratios to decline thanks to higher operating revenue.
- We expect bond issuance to pick up slightly over 2024-2025 as monetary policy eases from mid-2024 onward. Bond issuance will be mainly in Madrid, the Basque Country, and Andalusia.
- The central government will remain a key source of funding for Spanish LRGs.
- While we expect an increase in effective interest rates, and therefore interest payments, this will be gradual and will remain manageable, in our view.
61. Subnational Debt 2024 Switzerland: Resilient budget surpluses should enable further deleveraging, Feb. 29, 2024
Michael Stroschein, Frankfurt, +49 (0) 693 399 9251, michael.stroschein@spglobal.com
- Swiss local and regional governments' (LRGs) sound budgetary performance is supported by comparatively low cost inflation and a resilient economy that should enable continued net debt repayments in 2024 and 2025.
- Surpluses could, however, shrink due to reduced profit distributions from the Swiss National Bank (SNB) and pending, potentially costly legislative initiatives at the national level.
- S&P Global Ratings forecasts Swiss LRG annual gross borrowing of about CHF13 billion in each of 2024 and 2025. That includes CHF3.0 billion-CHF3.5 billion of new bonds, annually, with the new issue volume capped by LRGs' robust liquidity and limited bond maturities during the period.
- LRG's interest expense will gradually follow rising market yields, though in-place fixed-rate financing should mean the effective average portfolio interest rate will only marginally exceed 1% by 2025.
- Swiss LRGs issued CHF305 million of "digital" distributed-ledger based securities in 2023. We expect utilization of innovative instruments--including green and social bonds--will continue at a limited scale.
62. U.K. Social Housing Borrowing 2024: Borrowing capacity remains constrained, March 6, 2024
Karin Erlander, London, + 44 20 7176 3584, karin.erlander@spglobal.com
- We project the U.K. social housing sector's gross borrowing over the next two years will total £21 billion--of which £11 billion will be used for refinancing--and peak in 2025. We expect social housing providers will gradually return to debt capital markets after two years of limited issuances.
- We estimate the sector's debt will increase by 5% annually and reach almost £120 billion by 2026, with debt to S&P Global Ratings-adjusted nonsales EBITDA remaining above 20x.
- Relatively high investments in existing stock will crowd out debt-funded capital expenditure.
- Better-than-expected performance, higher grant funding, or fixed asset sales could enable social housing providers to develop and borrow more than we expect in our base case. Downside risks include additional requirements on existing stock or interest rates remaining high for longer.
- Debt in the sector is concentrated on the top 20 borrowers, with their share of total debt gradually increasing toward 50%.
63. How U.S. Not-For-Profit Acute-Care Providers Are Managing Risks From The Change Healthcare Cyber Attack, March 8, 2024
Aamna Shah, San Francisco, + 1 (415) 371 5034, aamna.shah@spglobal.com
- Repercussions from the Feb. 21, 2024, cyber attack on the nationwide claims processing provider Change Healthcare are still evolving.
- Disruption to Change Healthcare, a third-party vendor, introduces cash flow and liquidity risk for U.S. not-for-profit acute-care providers using its services.
- As full restoration of Change Healthcare's systems is still unknown, many acute-care providers have implemented workarounds to manage cash flow and liquidity.
- The credit impact could vary across rated providers, depending on credit specifics such as liquidity and reserves, ability to put workarounds in place, and the time it takes for Change Healthcare's systems to be operational.
64. Military Rental Housing 2024 Outlook: Bond Sector Stable Amid Slow Recruitment And Higher Expenses, March 7, 2024
Raymond S Kim, New York, + 1 (212) 438 2005, raymond.kim@spglobal.com
- Rating actions in 2023 reflect the sector's stability as most projects benefitted from higher basic allowance for housing (BAH) revenue and strong occupancy.
- Operating pressure could materialize if military recruiting targets trend below expectations, leading to less demand for military housing projects. While we don't believe this is an immediate risk, it could affect credit quality over the medium-to-long term.
- Debt service coverage for military housing projects has experienced some volatility due to increasing costs from insurance coverage, utility expense, and maintenance and repair requirements.
65. Market Insights: Sector Intelligence | U.S. Public Finance, March 6, 2024
Eden Perry, New York, + 1 (212) 438 0613, eden.perry@spglobal.com
- There have been more than 250 rating actions in U.S. public finance (USPF) through Feb. 29, 2024.
- Upgrades outpaced downgrades, driven primarily by rating activity in the local governments sector.
- Outlook activity was mixed across sectors.
66. Flooding Events For California Cities And Counties Are Unlikely To Abate And May Result in Long-Term Credit Risks, March 5, 2024
Li Yang, San Francisco, + 1 (415) 371 5024, li.yang@spglobal.com
- California's extremely high rainfall in 2023 is continuing into 2024 but has not yet had a material effect on credit quality for cities and counties rated by S&P Global Ratings, although the longer-term effects on issuers could be more significant.
- Maintaining high levels of reserves and liquidity is, in our view, one way issuers can navigate the short-term effects of extreme weather events, in particular as FEMA reimbursement, if approved, can take months or even a year to arrive.
- As weather events become more frequent or severe, we have observed that cities and counties have prepared by evaluating stormwater infrastructure or installing flood gates or moveable walls to redirect water to protect municipal assets.
- S&P Global Ratings continues to monitor the effects of extreme weather events on the credit quality of California cities and counties by evaluating infrastructure, risk management, and finances on a case-by-case basis.
67. U.S. Not-For-Profit Sector Has Recovered, But Some Entities Are Still Catching Up, March 1, 2024
Nicholas K Fortin, Augusta, + 1 (312) 914 9629, Nicholas.Fortin@spglobal.com
- Most U.S. not-for-profit entities successfully navigated the challenging operating environment during the height of the pandemic and largely emerged with a solid financial position.
- Despite fully reopening, demand for many museums, performing art venues, fitness centers, and other in-person event spaces remains muted following the pandemic.
- Endowments and investments experienced volatility in recent years but, thanks to significant gains in 2021, are largely well above pre-pandemic levels, which provides entities across the sector the cushion to fully recover financially.
- While macroeconomic pressures increased expenses and made financial recovery challenging, many entities have tapped their endowments or sought donor support to smooth operations.
Real estate
68. GCC Real Estate: How Credit Stories Have Evolved, March 11, 2024
Tatjana Lescova, Dubai, + 97143727151, tatjana.lescova@spglobal.com
- Real estate markets in various Gulf Cooperative Council (GCC) countries exhibit different dynamics. But rated sector companies enjoy relatively stable credit quality after a volatile few years that saw downgrades, recovery, and restoration of credit profiles for most of the rated real estate companies in the region.
- All but one GCC real estate company rated back in 2019 were downgraded by a notch during the pandemic amid our expectations of declining revenues, cash flow and EBITDA leading to higher leverage.
- Larger players with more diversified business mixes and bigger shares of more stable revenues demonstrated relatively better resilience.
- As of today, most of the GCC rated real estate companies have returned to or exceeded their 2019 rating level and we have stable outlooks on all companies, except for one which is on positive outlook.
- The Dubai real estate market, in particular, has benefited from fast price increases and volumes momentum since 2021, which has been supportive to a rapid recovery of the credit quality of local players.
69. Hong Kong's Easing Property Policy Isn't A Quick Fix For Developers, March 6, 2024
Edward Chan, CFA, FRM, Hong Kong, + 852 2533 3539, edward.chan@spglobal.com
- Hong Kong home prices will continue to fall in 2024 before stabilizing in 2025. Recent easing in property-cooling measures will only moderately stimulate demand in 2024.
- The stronger liquidity profile and track record of conservative financial management will underpin access to funding for rated developers.
- Rated developers will be prudent toward land acquisitions and use sizable proceeds from mass-market flats to reduce debt.
Retail
70. Shelved Or Not Shelved: Credit Implications Of The Kroger-Albertsons Merger Following FTC Complaint, March 5, 2024
Pablo A Garces, Dallas, + 1 (214) 765 5884, pablo.garces@spglobal.com
- If the merger is merely delayed, Kroger could benefit by ultimately reducing its financing package. Without a merger, it remains a leading grocer, but faces familiar competitive threats.
- A merger will likely lead to a multiple-notch upgrade for Albertsons. Without one, Albertsons will likely consider alternate paths to maximize shareholder returns.
- This merger presents a unique opportunity for wholesale grocery distributor C&S Wholesale Grocers to bolster its presence in the retail space, though the acquisition presents execution risk.
Sovereigns
71. Sovereign Debt 2024: Borrowing Will Hit New Post-Pandemic Highs, Feb. 27, 2024
Karen Vartapetov, PhD, Frankfurt, + 49 693 399 9225, karen.vartapetov@spglobal.com
- We estimate sovereigns' long-term borrowing will reach $11.5 trillion in 2024, more than 50% above the pre-pandemic-levels, amid softer GDP growth, the heavy election schedule, elevated interest, and defense spending.
- The U.S. will account for 39% of global long-term issuance, increasing its 2024 borrowing by $1 trillion to the total of $4.5 trillion, the biggest nominal increase among all rated sovereigns, as growth decelerates and the upcoming elections complicate fiscal consolidation.
- For the first time on record, we project China will overtake Japan as the second-largest sovereign issuer, with the equivalent of $1.7 trillion of gross long-term issuance, amid government efforts to support the economy.
- Other major sovereign issuers, primally G-7 countries, will keep borrowing broadly flat compared with last year, the notable exception being the U.K., which in U.S. dollar terms will borrow 28% more than in 2023.
- Even if government borrowing costs have likely peaked, the effective rate of servicing existing debt will remain higher than the pre-pandemic level and given larger government debt stocks, interest bills for sovereigns are set to stay elevated in the years to come.
Structured finance
72. Norwegian And Finnish Covered Bond Market Insights 2024, March 11, 2024
Casper R Andersen, Frankfurt, + 49 69 33 999 208, casper.andersen@spglobal.com
- Finnish and Norwegian households' debt servicing capacity remains sound despite rising interest rates, which have cooled the housing markets.
- Despite house price corrections, we expect mortgage credit performance in both countries to remain relatively stable.
- Healthy rating buffers in most covered bond programs continue to support rating performance, despite a weakening economic growth outlook.
73. U.S. Auto Loan ABS Tracker: January 2024 Performance, March 8, 2024
Amy S Martin, New York, + 1 (212) 438 2538, amy.martin@spglobal.com
- U.S. auto loan ABS performance weakened in January, with prime and subprime annualized losses both increasing. Prime losses reached their highest January level since 2017.
- Recoveries improved marginally month on month for the first time since June 2023. However the recoveries were still lower on a year-over-year basis and as compared to January 2020 pre-pandemic's level.
- The delinquencies increased marginally for subprime and remained at the same level for prime. Subprime 60+ day delinquencies now stand at their highest ever level.
- In February, we revised our expected cumulative net loss levels for five transactions, raised six ratings, downgraded four, affirmed 16, and extended the CreditWatch with negative implications on three classes.
Daniel Hu, FRM, New York, + 1 (212) 438 2206, daniel.hu@spglobal.com
- Since late January 2024, U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) portfolios have seen downgrades across several widely held obligors.
- The impact of the recent defaults hasn't shown up yet in junior overcollateralization (O/C) test cushions, but these have already declined notably over the past year, mostly due to haircuts from previous defaults.
75. SF Credit Brief: U.S. CMBS Overall Delinquency Rate Rose 5 Bps To 4.4% In February 2024; Office Saw The Highest Increase For the Third Consecutive Month, March 1, 2024
Senay Dawit, New York, + 1 (212) 438 0132, senay.dawit@spglobal.com
- The U.S. CMBS overall delinquency rate increased by 5 basis points month over month to 4.4% in February.
- Seriously (60-plus-days) and 120-plus-days delinquent loans represented 85.4% and 18.4% of all delinquent loans, respectively.
- Special servicing rates increased for office and retail loans, and decreased for lodging, multifamily, and industrial loans.
- Delinquency rates increased for office and retail loans, and decreased for lodging, multifamily, and industrial loans.
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The Ratings View:
We published the latest "The Ratings View", which spotlights key developments and asset class trends on a weekly basis, on March 6.
This Week In Credit:
We published the latest "This Week In Credit", our data-driven research snapshot that provides forward-looking, actionable insights on weekly market-moving credit trends, on March 11.
This report does not constitute a rating action.
Primary Credit Analyst: | David C Tesher, New York + 212-438-2618; david.tesher@spglobal.com |
Secondary Contacts: | Eunice Tan, Hong Kong + 852 2533 3553; eunice.tan@spglobal.com |
Jose M Perez-Gorozpe, Mexico City (52) 55-5081-4442; jose.perez-gorozpe@spglobal.com | |
Paul Watters, CFA, London (44) 20-7176-3542; paul.watters@spglobal.com | |
Joe M Maguire, New York (1) 212-438-7507; joe.maguire@spglobal.com | |
Yucheng Zheng, New York + 1 (212) 438 4436; yucheng.zheng@spglobal.com | |
Research Contributor: | Sourabh Kulkarni, CRISIL Global Analytical Center, an S&P affiliate, Mumbai; sourabh.kulkarni@spglobal.com |
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