(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 Nov. 16, 2022.)
This week, our key takeaways from recent articles include the following: the global and country-by-country 2023 outlook for the banking sector, our speculative-grade corporate default forecasts for the U.S. and Europe, and global debt leverage. We dive into the derivatives exchanges, transportation infrastructure and social housing providers in the U.S., the gas and property sector in China, our updated oil and gas price assumptions, infrastructure in Latin America, Mexican municipalities, French local and regional governments, and the air passenger traffic recovery in Europe. We also feature a scenario analysis for lodging-backed CMBS, the 'BBB' pulse, risky credits in emerging markets, the emerging market monthly highlights, EMEA structured finance chart book, the Danish covered bond market, and the Southeast Asia property update. Regarding the Russia-Ukraine conflict, please see our macroeconomic and credit updates here: Russia-Ukraine Macro, Market, & Credit Risks.
- S&P Global Ratings Credit Research & Insights expects the U.S. and European trailing-12-month speculative-grade corporate default rate to rise to 3.75% and 3.25%, respectively, by September 2023, from 1.6% and 1.4% as of September 2022.
- The darkened economic outlook presents headwinds for banks' asset quality, business volumes, and financing conditions. Positively, earnings greatly benefit from the monetary policy tightening. Rating trends across the global banking sector will be tested in 2023. We anticipate increasing credit divergence. Deterioration will be more acute for emerging market banks, nonbank financial institutions, and entities in countries most exposed to energy restrictions.
- With global debt leverage higher than before the Global Financial Crisis, and with interest rates rising and economies slowing, painful times are ahead for corporate borrowers at the lower end of the credit spectrum--and some governments--that are loaded down with debt they built up during better times.
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).
Key Takeaways From Our Most Recent Reports
Renato Panichi, Italy, + 39 0272111215, email@example.com
- Four-fifths of rated companies have a stable outlook, which indicates credit resilience ahead of a potential recession in 2023. Negative outlooks have increased to 12% from a low 2% at end-2021, but they remain well below the level during the COVID-19 pandemic.
- Revenues should increase by about 5% in 2023, as likely falling volumes due to the weaker economic environment should partly offset the continued pass-through of cost inflation.
- High energy costs are a key issue for Italian companies and, if persistent, could impair their competitiveness. Average wholesale natural gas price has exceeded €100 per megawatt hour (/MWh) in 2022, 5x higher than 2019. The average wholesale electricity purchase price was about 9x higher in third-quarter 2022 than in 2019.
- Stable average margins in 2022-2023 mask significant differences between sectors. All sectors with high or moderate energy intensity will experience substantial margin pressure in 2022-2023, notwithstanding successful cost pass-through.
- We expect corporate investment growth to moderate in 2023 compared with 2022, when companies benefited from a lag effect from the 2021 business recovery. Construction volumes should benefit from the infrastructure works linked to Italy's recovery and resilience plan, the PNRR, but residential renovation should moderate in 2023.
- Yields have widened significantly since the beginning of 2022. Persistent high interest rates mean that companies with high debt burdens will see their debt-service ratios worsen significantly over the next few years.
Sam C Holland, FCA, London, +44 20 7176 3779, firstname.lastname@example.org
- Unprecedented volatility in the gilt market in September created exceptional liquidity stress for U.K. corporate defined benefit (DB) pension schemes using Liability-Driven Investment (LDI) strategies.
- Timely intervention by the Bank of England through gilt purchases and the creation of a temporary collateral repo facility helped DB pension schemes survive a liquidity crisis. There was no solvency threat to U.K. DB pension schemes, in our view.
- In fact, the solvency of most DB pension schemes across the globe, including the U.K., has improved significantly thanks to a substantial increase in 'AA' corporate bond yields.
- Higher interest rates result in higher discount rates on the net present value of DB pension schemes, thereby reducing the financial burden of the schemes, which could benefit their sponsors' creditworthiness in the long term. Of course, higher interest rates are a negative in other ways for corporate borrowers, so the overall picture for credit is more nuanced.
- Lower funding deficits may encourage some corporate sponsors to reduce their exposure to legacy DB pension schemes by arranging a buy-in or buyout with an insurance company. We generally view such actions as neutral to credit because there are added costs associated with lower volatility.
3. Accounting Hot Topics On The Horizon And Their Credit Metric Relevance, Nov. 15, 2022
Leonard A Grimando, New York, + 1 (212)438 3487, email@example.com
- The Financial Accounting Standards Board (FASB) has released a new accounting update requiring disclosures of reverse-factoring/supply-chain finance arrangements starting in 2023. S&P Global Ratings typically views payments made after 90 days by buyers to financial intermediaries involved in reverse-factoring programs as a form of borrowing.
- The surge in interest rates will likely lead to improved pension funding at year-end 2022; however, other factors such as market performance, asset mix, and company contribution levels will also come into play.
- U.S. private companies will report under the new lease accounting standard in their 2022 annual reports when they report in early 2023. We expect ratings changes to be minimal.
- The FASB has added a project on certain crypto assets. In analyzing a company's cash and investments, we focus on its accessibility and liquidity. We don't treat digital assets as cash and cash equivalents for netting debt, but rather consider them qualitatively.
- Highly leveraged issuers could be pressured from the lower interest expense deductibility for tax reporting, absent tax planning, net operating losses (NOLs), and tax credits resulting in higher taxes paid. The change will mainly have a negative impact on funds from operations (FFO) and will reduce accessible cash for offsetting debt.
Credit trends and market liquidity
4. 'BBB' Pulse: Five Things To Watch As Recession Risks Mount, Nov. 16, 2022
Evan M Gunter, Montgomery, + 1 (212) 438 6412, firstname.lastname@example.org
- We estimate the amount of debt associated with the downgrades of nonfinancial fallen angels in the U.S. and EMEA could rise 22% over the next 12 months to $120.1 billion.
- In a downside scenario, we estimate fallen angels would rise to $182.9 billion.
- Near term downgrade risk appears muted as just 9% of 'BBB' non-financials in the U.S. and EMEA have a negative bias and the number of potential fallen angels remained stable over the past three months (around 20).
- However, risk is mounting over the longer-term as the expected economic downturn will weigh on credit cushions and consumer demand.
5. Weakest Links Rise, Signaling Defaults Ahead, Nov. 15, 2022
Nicole Serino, New York, +1(212)4381396, email@example.com
- The global weakest links tally increased to 239 as of Oct. 17 from 220 as of Sept. 19 as downgrades to 'B-' rose amid deteriorating economic and credit conditions.
- Consumer products and high technology led the new additions to the tally.
- Despite rising weakest link totals, Europe is the only region where weakest links are above their long-term average.
- Because weakest links make up a larger share of defaults in periods of economic stress, we can expect defaults to increase following the recent rise in weakest links.
6. Europe And Emerging Markets Are Default Hotspots, Nov. 11, 2022
Nicole Serino, New York, +1(212)4381396, firstname.lastname@example.org
- The global corporate default tally rose by seven to 68 as of Oct. 31, four above comparable 2021 levels. Both Europe and emerging markets have higher year-to-date defaults than 2021.
- Europe added three defaults, and we estimate the European trailing-12-month speculative-grade corporate default rate will jump to 1.8% as of October 2022 from 1.3%.
- Defaults in emerging markets continue to climb and are closing in on 2x 2021 year-to-date levels.
Jon Palmer, CFA, New York, 212 438 1989, email@example.com
- Negative rating momentum increased in September, with five new potential fallen angels, 18 new weakest links, and 59 new potential downgrades. These numbers were all up from no new potential fallen angels, six new weakest links, and 46 new potential downgrades in August.
- New potential downgrades were led by consumer products (nine in the U.S., two in Europe, and one in Canada), high technology (five in the U.S., two in Europe, and one in Canada), financial institutions (four in the U.S. and two in EEMEA), and health care (five in the U.S.).
- Inflationary pressures were cited in 51% of new potential downgrades. Meanwhile, 40% of new potential upgrades benefited from higher commodity prices.
- 74% of sectors saw an increase in negative bias (proportion of ratings with negative outlooks or on CreditWatch negative) in September. Overall, consumer products, autos, and retail/restaurants have the highest downgrade potential.
- Nearly two-fifths of 'BBB' category issuers on CreditWatch negative are in utilities. The 'BBB' category has the highest share of potential downgrades on CreditWatch negative, at 21%.
8. Risky Credits: In Emerging Markets, Downward Rating Transitions Prevail, Nov. 22, 2022
Luca Rossi, Paris, +33 6 2518 9258, firstname.lastname@example.org
- The number of issuers rated 'CCC+' or lower in emerging markets (EMs) rose to 23 in third-quarter (Q3) 2022 from 21 as of June 30, 2022, and now constitutes 13% of speculative-grade entities we rate in EM17*, up from 11% in the second quarter.
- Refinancing risk is a key consideration, with 41% of ratings in the 'CCC' and 'C' categories carrying a negative outlook or CreditWatch and debt of $17.1 billion nearing the 2020 peak of $18.1 billion.
- Argentina has the highest number of ratings in the 'CCC' and 'C' categories, followed by Brazil, while by sector, real estate, transportation, and utilities lead the tally.
Ekaterina Tolstova, Dubai, +971 (0) 547923598, email@example.com
- In 2021, the number of corporate defaults in emerging and frontier markets decreased to 14 from 26 in 2020, and all defaulters in 2021 were rated speculative grade at the beginning of the year.
- Defaults fell across a number of sectors, with transportation, financial institutions, forest and building products/homebuilders, and energy and natural resources accounting for about 65% of 2021 defaults.
- The majority of defaults were from Latin America and emerging Asia, with two countries--Mexico and Argentina--accounting for over half of the total defaults (57%).
Nick W Kraemer, New York, + 1 (212) 438 1698, firstname.lastname@example.org
- We expect the European trailing-12-month speculative-grade corporate default rate to reach 3.25% by September 2023, from 1.4% in September 2022. In this baseline forecast, 25 speculative-grade companies would default owing to slowing economic growth, a technical recession in the U.K., increasingly difficult financing conditions, and falling profit margins.
- Recession odds are rising for Europe, particularly as interest rates climb and energy prices remain volatile, with the potential for more increases on both fronts.
- We think the European speculative-grade corporate population faces many potential challenges--which, if they occur, could lead to defaults edging higher toward our pessimistic case.
- With inflation remaining high and central banks raising rates quickly, any shock to energy prices would push consumer spending down, which would likely result in even more interest rate hikes.
11. Risky Credits: The Respite In Europe May Be Short-Lived, Nov. 3, 2022
Nicole Serino, New York, + 1 (212) 438 1396, email@example.com
- The number of European ratings 'CCC+' or lower has dropped but partly because several defaults reduced it to 45 as of Sept. 30, 2022, from 52 as of June 30, 2022; such issuers face a tough period due to persistent inflation, slower growth, tighter financing conditions, and continuing geopolitical tensions
- The share of 'CCC' ratings is 1.9x higher than the pre-pandemic level and about 7.5% of speculative-grade borrowers are now rated in the 'CCC' category.
- Consumer products, media and entertainment, and oil and gas feature prominently with the most 'CCC/CC' ratings, while by country, the U.K. has the highest volume of debt rated 'CCC+' or lower.
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, firstname.lastname@example.org
- The Mexican structured finance national scale ratings default rate more than doubled to 2.2% in 2021, from 0.8% in 2020.
- The downgrade rate increased slightly to 8.8% in 2021, up from 8.3% in 2020, marking the highest rate since 2013, with downgrades occurring across multiple sectors.
- The upgrade rate also more than doubled to 2.2% in 2021, up from 0.8% the previous year.
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, email@example.com
- We expect the U.S. trailing-12-month speculative-grade corporate default rate to reach 3.75% by September 2023, from 1.6% in September 2022. To reach this baseline forecast, 69 speculative-grade companies would need to default.
- This is a slight uptick in our default expectations from last quarter, since our economists now expect a recession in 2023, inflation remains high, consumer sentiment is falling, and floating-rate borrowing costs continue to rise.
- Much will depend on the depth or duration of the recession, which for now is expected to be short and shallow. Continued interest rate increases by the Fed could add further stress.
- If a deeper or longer recession were to occur--and in particular a stubborn, elevated rate of inflation--our pessimistic scenario of a 6% default rate (111 defaults) could be realized.
14. The U.S. Distress Ratio Jumps Back Above Its Five-Year Average, Nov. 4, 2022
Nicole Serino, New York, + 1 (212) 438 1396, firstname.lastname@example.org
- The U.S. distress ratio increased to 7.6% as of Oct. 17, from 6.6% as of Sept. 22, as investors demand a higher return on debt held by riskier companies.
- The volume of debt trading at distressed levels has more than tripled over the last year, with $89 billion of distressed debt as of October 2022 compared with just $26 billion in October 2021.
- Health care and retail lead with the largest year-over-year increase in volume of debt trading at distressed levels.
15. Asia-Pacific Sector Roundup Q1 2023: Cracks In The Wall, Nov. 14, 2022
Eunice Tan, Hong Kong, +852-2533-3553, email@example.com
- Confluence of headwinds. Asia-Pacific is fighting on four fronts: the global economic slowdown, high inflation, rising interest rates, and weakening currencies. China is contending with subdued growth amid its COVID policy stance and real estate sector woes. And some sectors and issuers in the region are feeling the heat from rising geopolitical tensions (e.g., Asia-Pacific tech firms amid the U.S. Chips Act). These risks are forming cracks in Asia-Pacific's credit wall.
- A greater divide. Monetary policy remains divergent across Asia-Pacific central banks. Most continue to hike rates to slow inflation and stem capital outflows; China and Japan are exceptions. Concurrently, domestic currency depreciation has created winners and losers. The region's exporters benefit from being competitive, but midstream and downstream sectors dependent on imported materials could see costlier inputs, denting margins. The ability to pass through input costs will differentiate corporate sectors.
- Higher financing, tighter liquidity. The availability of and access to financing could tighten as investors and lenders turn more selective. Demand for higher yields and a strong U.S. dollar could intensify debt burdens, particularly for offshore borrowers. To cope, borrowers could turn onshore by tapping bank loan facilities and domestic capital markets. While banks could see higher interest income from such loans, the economic downturn may entail higher loan-loss provisions.
16. Asia-Pacific's Strong-Dollar Problem: Inconvenience Today, Headache Tomorrow, Nov. 10, 2022
Simon Wong, Singapore, (65) 6239-6336, firstname.lastname@example.org
- Dollar strengthening, a source of much pain among Asia-Pacific corporates historically, has been mostly manageable so far this year; however, increased input costs and rising rates are hitting some pockets of our rated portfolio.
- Corporates facing low to moderate risk of local-currency depreciation usually have hedging in place, or have the ability to pass through higher input costs; exporters with substantial dollar revenue have also benefited from the strong dollar.
- Widening current account deficits in some emerging markets make further depreciation likely, adding stress to firms with large maturing dollar debt.
17. A Slower China: Where Are The Pockets Of Risk?, Nov. 3, 2022
Charles Chang, Hong Kong, (852) 2533-3543, email@example.com
- China's zero-COVID policy and weak property market are hurting activity and confidence. At the same time, geopolitical risks are elevated, given the war in Ukraine and the ongoing tech-trade dispute between China and the U.S.
- In this article, we summarize discussions on growth and regulatory conditions for various corporate and financial sectors.
18. A Slower China: Is Stimulus Working And Who's Paying For It?, Nov. 3, 2022
Eunice Tan, Hong Kong, + 852 2533 3553, firstname.lastname@example.org
- China has long shown its willingness for stimulus in times of economic stress. However, in recent years the country has seem diminishing returns on such macro and financial levers.
- Stimulus programs can also conflict with reform goals to rein in government debt and economic leverage.
- Moreover, the country's zero-COVID policy has in some cases delayed stimulus aimed at offsetting economic weakness in other areas, such as waning property investments.
19. A Slower China: What Are The Macro Implications?, Nov. 3, 2022
Eunice Tan, Hong Kong, + 852 2533 3553, email@example.com
- China's zero-COVID policy and weak property market are hurting consumption and business confidence. Slower growth in turn has implications for the health of local and sovereign governments, banks, and various corporate sectors.
Jose Perez Gorozpe, Spain, +34 914233212, firstname.lastname@example.org
- Headline inflation started to moderate across some emerging markets (EMs). With a few exceptions, energy inflation decreased across most key EMs, in line with current global trends. Nevertheless, core and food inflation continues to increase outside of LatAm, suggesting a more persistent nature of inflationary pressures.
- Approaching the peak of the tightening cycle?Some economies in EM EMEA and LatAm have paused the tightening path, and we expect several central banks in LatAm to cut interest rates next year. Nevertheless, uncertainty over the food and energy prices outlook, as well as potential persistence of core inflation, suggest upside risks to current policy rates, especially among Central and Eastern European (CEE) economies.
- The EM GDP growth pace is decelerating in line with our expectations. Q3 data has been published for most key EMs, pointing to a deceleration (with a few exceptions, notably China). Risks to growth remain substantial, especially in CEE, where we expect full-year recession in a downside scenario that includes disruption of energy supplies, a deeper economic downturn in Western Europe, and higher global interest rates.
- Financing conditions appeared stable last month, but significant divergence exists among regions. Risk premia has stabilized in EM EMEA and LatAm. Spreads in EM Asia have widened, given concerns about China's zero-Covid stance. Taking into consideration external macroeconomic environment, we expect spreads to remain volatile in the nearest term.
21. Global Debt Leverage: How Heavy Is The World's Debt Burden?, Nov. 21, 2022
Terence Chan, Melbourne, + 61 3 9631 2174, email@example.com
- Global leverage is at a historic high of 349% based upon global debt-to-GDP--more than 25% higher than the 278% in the pre-2008 financial crisis era.
- Specifically, rated sovereigns took advantage of the protracted period of low interest rates that central banks had maintained, to expand their debt-to-GDP ratio by more than one-third, to a projected 87% in 2022, from 62% in 2008.
- Resolving the debt overhang, amid slower growth and higher interest rates, could be painful--with governments cutting expenditures and borrowers defaulting.
22. U.S. Holiday 2022 Sales Outlook: Santa’s Bag Will Be Smaller This Year, Nov. 10, 2022
Sarah E Wyeth, New York, + 1 (212) 438 5658, firstname.lastname@example.org
- S&P Global Ratings analysts in the retail, restaurant, and consumer goods sectors collectively forecast a 4.5% increase in retail sales during the November and December 2022 holiday season.
- Adjusted for inflation, we expect holiday sales to contract as consumers allocate more of their budgets to essentials like food and gas.
- Retailers will need to use promotions and discounts to clear excess inventory that accumulated as port congestion eased earlier in the year.
- Weak volumes and persistent cost inflation will negatively affect credit quality of retailers most exposed to holiday shopping, along with their suppliers of discretionary categories such as durables, household products, apparel and durables.
Mark Habib, Paris, + 33 14 420 6736, email@example.com
- The cyber threat to corporate issuers is predominantly concentrated in sectors that have critical infrastructure systems that are highly sensitive to business interruption or have extensive and sensitive customer data, technology, or intellectual property (IP).
- S&P Global Ratings credit analysts believe business interruption and reputational damage are the most acute credit risks from cyberattacks for corporates.
- While rating actions related to cyber risk have been modest to date, risk levels remain elevated amid increasing technological dependency and global interconnectedness. Our analysis of cyber incidents across our rated companies illustrates the growing likelihood for more significant impact on companies' business and financial profiles.
24. China's Trend Growth To Slow Even As Catchup Continues, Nov. 10, 2022
Louis Kuijs, Hong Kong, +852 9319 7500, firstname.lastname@example.org
- We expect China's trend growth to slow to 4.4% over 2022-2030 and 3.1% in 2031-2040, from 6% in 2017-2021.
- The gradual slowdown, broadly similar to our last assessment in 2019, is driven by demographics, rebalancing, convergence and reduced international economic interaction amid efforts by the U.S. and other countries to decouple at least partly from China.
- Still, this forecast implies continued catchup in productivity and living standards to around 40% of U.S. levels by 2040 (in purchasing power parity terms), a level South Korea reached in 1997.
- Our downside scenario features less reform and opening-up by China than in the baseline and more decoupling by the U.S. and other advanced countries. Our upside scenario includes more policy efforts to boost growth.
Satyam Panday, San Francisco, +1 (212) 438 6009, email@example.com
- Emerging market economic activity has slowed further amid elevated prices and tighter financial conditions.
- However, commodity prices have continued to decline as supply-chain constraints improve.
- The currency weakening against the U.S. dollar remains a major challenge in the region.
Valerijs Rezijs, London, firstname.lastname@example.org
- Running against the tide, the currencies of Armenia, Georgia, and Tajikistan have been steadily appreciating over the course of 2022.
- Most other emerging market currencies have depreciated across the board because of the global tightening of financing conditions and worsening current account balances, owing to the commodity price shock after the start of the Russia-Ukraine conflict.
- Central Asian and Caucasus economies have experienced a massive influx of people from Russia, who fled the country after the start of Russia-Ukraine conflict. As a result, money transfers from Russia to these countries have skyrocketed.
27. Central And Eastern Europe: Growth Freezes, Risks Mount, Nov. 10, 2022
Tatiana Lysenko, Paris, +33 -14 -420-6748, email@example.com
- Worsening geopolitical and financial conditions have dented growth momentum in Central and Eastern Europe. A sharp growth slowdown is already underway as persistently high inflation is eroding consumer purchasing power, financial conditions tighten, and the impetus from reopening economies and pent-up demand fades.
- In our downside scenario, most CEE-6 economies would be in recession in 2023. This scenario assumes a complete cut-off of gas supplies from Russia, subsequent economic recession in Germany, and tighter global financing conditions, which would knock off 2.1 percentage points from our baseline 2023 forecast for regional 1.4% GDP growth.
- The scale of the shock triggered by the Russia-Ukraine war could lead us to revise some of our baseline macroeconomic and rating assumptions for CEE-6 sovereigns, which would weigh on our view of sovereign credit quality. We point out four key risks for CEE-6 sovereigns a sharp economic downturn amplified by recession in broader Europe, the constrained ability of CEE-6 governments to benefit from EU transfers, elevated fiscal pressures, and suboptimal monetary policy choices.
Geeta Chugh, Mumbai, +912233421910, firstname.lastname@example.org
- Lower growth. Asia-Pacific's economic growth is being hit by potential recessions in the U.S. and Europe, and China's lower growth rates. As the region is a net exporter, a global slowdown will hinder the recovery of corporate and government revenues, which in many cases aren't yet back to 2019 levels.
- Higher cost of goods. Although consumer price index (CPI) inflation in parts of Asia-Pacific is tamer versus Europe or the U.S., the higher prices of energy, commodities and other goods are hurting borrowers. Energy subsidies are squeezing government finances. Many corporates have yet to fully pass through the additional cost of goods, implying CPI inflation could persist.
- Tighter financing. Excepting China and Japan, official interest rates in the region are rising--in part to combat inflation, in part to defend domestic currencies against the strong U.S. dollar. Chinese authorities have lowered policy rates to boost the economy. Meanwhile, the Bank of Japan refuses to cave into market pressure. Regardless, investors and lenders are becoming more selective, particularly toward the lower end of the credit scale. This implies financing conditions may further tighten.
Natalia Yalovskaya, London, + 44 20 7176 3407, email@example.com
- A fully fledged recession in Europe, which could have a severe impact on asset quality, and on banks' business and profitability prospects.
- Persistently high inflation, which would drive up the cost of living and squeeze financial conditions for households and corporates. This would erode demand for new lending and weaken asset quality and make it difficult for banks to contain operating costs.
- Heightened market turbulence, which could restrict access to financing and increasing the cost of funding. This would put riskier borrowers at even greater risk, ultimately pushing up banks' credit costs and depressing their profits. Banks could also see higher mark-to-market losses and weaker earnings from activities such as asset management, and an increase in unexpected event risk.
Nicolas Charnay, Frankfurt, +49 69 3399 9218, firstname.lastname@example.org
- We expect the performance of European banks' residential mortgage loan books will remain resilient to economic slowdowns in most European countries, with higher, but still limited, credit losses even if house prices correct.
- For countries with the highest overvaluation risks, banks benefit from relatively strong mitigants--such as the strength of household finances--which should limit mortgage credit losses.
- In countries with traditionally weaker safeguards for banks--as evidenced by historically worse mortgage performance--we have seen limited signs of overheating house prices, and our base case for softer economic activity and labor markets in most of these countries remains broadly supportive of mortgage performance.
- For weaker borrowers that are experiencing the worst of the cost of living squeeze, banks and governments would likely seek ways to promote some restructuring of mortgage lending terms, and associated credit costs would likely remain contained.
- If we changed our view of the relative strengths or weaknesses in a given banking system's mortgage market, we would likely reflect this in our economic risk assessment for that system. In turn, this could influence our ratings on banks that we see as materially exposed to this asset class.
31. Top 50 European Banks: Higher Rates Support Risk-Adjusted Capital Ratios, Nov. 10, 2022
Mehdi El mrabet, Paris, + 33 14 075 2514, email@example.com
- We expect a pause in the long running improvement to capitalization among Europe's top 50 banks, with lower lending and business activity leaving average risk-adjusted capital (RAC) ratios at about 11.3% over 2023.
- Strong capitalization should remain a generally neutral or positive influence on our ratings, and the banking sector should stay profitable as higher interest rates offset rising costs.
- A deep recession could prompt banks to reconsider shareholder distributions to protect capital.
Giles Edwards, London, + 44 20 7176 7014,firstname.lastname@example.org
- Financial market infrastructure is likely to remain one of the strongest-performing sectors under the difficult economic and market conditions that seem likely to persist over the coming months.
- While equity markets have suffered, operators of derivatives exchanges and clearinghouses are seeing a particularly strong uplift in cyclical activity, and so earnings.
- This surge arises from a heady mix of geopolitical events, cyclical shifts, and structural changes, none of which will rapidly dissipate.
- Because further episodes of extreme volatility or illiquidity in financial markets seem likely in 2023, collateral and liquidity will remain critical to the efficient functioning of the financial system.
- These episodes could pose a stiffer test for all FMIs in 2023, though we expect earnings performance to remain solid and clearinghouses--the financial system's central counterparties--to remain resilient.
33. Global Bank Outlook 2023: Greater Divergence Ahead, Nov. 17, 2022
Emmanuel Volland, Paris, +33-1-4420-6696, email@example.com
- The darkened economic outlook presents headwinds for banks' asset quality, business volumes, and financing conditions. Positively, earnings greatly benefit from the monetary policy tightening.
- Rating trends across the global banking sector will be tested in 2023. Our banks' net outlook ratio is likely to deteriorate from a 6% positive.
- The likelihood of economic recession in Europe and the U.S. has increased; inflation is at multi-decade highs in many countries; and the spillover from the Russia-Ukraine war continues.
- Strong bank balance sheets should buffer headwinds, with solid capitalization and sound asset quality.
- We anticipate increasing credit divergence. Deterioration will be more acute for emerging market banks, nonbank financial institutions, and entities in countries most exposed to energy restrictions
34. Global Bank Country-By-Country Outlook 2023: Greater Divergence Ahead, Nov. 17, 2022
Gavin Gunning, Melbourne, +61-3-9631-2092, firstname.lastname@example.org
- Global banks are much better capitalized than in the past, offering them some resilience against weaker economic growth and high inflation.
- A key risk to bank ratings is the emergence of harsher economic and financing conditions than our base case. Additional key risks are potentially higher corporate insolvencies exacerbated by high corporate leverage, high government leverage, and weaker property sectors.
- We anticipate increasing credit divergence between the strong and weak. Challenges may be more acute and swift for NBFIs, and certain emerging market banks. Entities in countries most exposed to energy restrictions may also be challenged.
35. GCC Banks Will Enter An Uncertain 2023 On Solid Footing, Nov. 7, 2022
Mohamed Damak, Dubai, + 97143727153, email@example.com
- We expect GCC banks' earnings to recover almost to pre-pandemic levels in 2022, helped by stronger economic activity and higher interest rates.
- Support from regulators helped avoid the worst for asset quality indicators, but we still foresee a slight deterioration from pandemic-related imbalances.
- The economic backdrop for 2023 appears less certain as the global economy slows, and we assume the Brent oil price will average $85 per barrel in 2023.
- Government-sponsored development plans such as Vision 2030 in Saudi Arabia are creating opportunities for the GCC banking systems, but liquidity could be less abundant for some.
- About 35% of ratings carry positive outlooks for potential improvement in their respective sovereign's creditworthiness or for idiosyncratic reasons.
36. China's LGFV Land Grab: Things That Can't Last Won't, Nov. 14, 2022
Laura C Li, CFA, Hong Kong + 852 2533 3583,firstname.lastname@example.org
- Land purchases by China's local government financing vehicles (LGFVs) may have inflated government revenues, raising moral hazard risk.
- The trend could also pile on commercial and financial risk for LGFVs, if land prices and genuine demand do not recover soon.
- Given such unsustainability and recent regulatory warnings, we expect the recent upswing in LGFV land purchases will be short-lived.
37. EMEA Utilities | Regulation And High Prices Offset Affordability And Dividend Risks, Nov. 14, 2022
Emmanuel Dubois-Pelerin, Paris, + 33 14 420 6673, email@example.com
- Inflation will improve remuneration of regulated businesses in the long term, while the main performance determinant for unregulated activities remains high power prices; but inflation-linked debt may strain credit metrics due to the timing of inflation pass through.
- In the short term, inflation reduces rating headroom for unregulated utilities amid cost increases until benefits from higher power prices kick in; regulated utilities can pass such costs through to end users in most supportive regulations.
- As long-term yields outpace inflation, they should lighten utility companies' pension and asset-retirement burdens, although the credit impact depends on financial policy.
38. Europe's LNG Focus Can Bring Pain As Well As Gain For Utilities, Nov. 9, 2022
Emmanuel Dubois-Pelerin, Paris, + 33 14 420 6673, firstname.lastname@example.org
- Europe's forced replacement of nearly 80% of Russian gas supply, mainly by buying liquefied natural gas (LNG), makes its gas balance tight, pricing dynamics riskier, and policymaking more complex, but can benefit utility companies that already have or plan to build LNG infrastructure.
- We estimate that Europe needs a massive amount of LNG--about 150 billion cubic meters (bcm) annually--through 2025, nearly 65% more than the 90 bcm it purchased in 2021; but its utilities face intense competition, especially from China, in a global sellers' market.
- They also face credit risks if LNG prices go way beyond our base case of $40 per mmBtu in 2023 and $25 thereafter, threatening earnings and liquidity, or if assets become stranded after 2030 as Europe fulfils its decarbonization ambitions.
- We also see new areas of risk for security of supply, given Europe's dispersed LNG buying from few global suppliers and supply chain bottlenecks that could hamper delivery to end users, particularly in southern Germany and central Europe.
Julyana Yokota, Sao Paulo, +55 11 3097 9731, email@example.com
- Latin American toll-road operators are sensitive to protests against steep tariff increases.
- Apart from Argentina, regulatory framework for utilities are generally supportive across the region, but some utilities in Chile and Mexico won't receive higher tariffs to cover costlier expenses.
- Toll-road operators across the region have a high share of floating debt, which could raise risks, given the time lag of cost pass-throughs amid likely persistence of high interest rates in 2023.
Alexander Shvetsov, New York, + 1 212-438-1339, firstname.lastname@example.org
- North American speculative-grade midstream and refining companies are facing a debt-maturity wall in 2023- 2026.
- Rising interest rates are translating to higher refinancing costs for U.S and Canadian energy infrastructure issuers, especially speculative-grade ones.
- Despite refinancing challenges, we believe most issuers in the sector will be able to access the capital markets and satisfy their upcoming maturities, but to do so, some might need to pursue alternative solutions.
41. EMEA Insurance Outlook 2023: In The Midst Of The Perfect Storm, Nov. 15, 2022
Gerrit W Jepsen, CFA, New York, + 1 (212) 438 2529, email@example.com
- Capital market volatility, recessionary risks, and heightened inflation pose a risk to EMEA insurers, while rising interest rates support investment income.
- Earnings year to date have displayed mark-to-market investment revaluations disproportionally impacted by reported IFRS 4 shareholder equity and investment impairments.
- In most EMEA markets, non-life premium rate increases are attempting to match rises in inflation rates.
Oil and gas
42. China Gas Sector Easing Into Lower Demand, Nov. 21, 2022
Congyun Zhou, Singapore, + 852 25333576, firstname.lastname@example.org
- Increased imports of piped natural gas and long-term contract liquefied natural gas will position China to meet moderating demand.
- Distributors will likely benefit from declining gas costs in 2023, reflecting the trajectory in oil prices and lower reliance on spot purchases.
- Recovery in distributors' earnings will rest on increasing volumes and the ability to pass on costs following a tough 2022.
Thomas A Watters, New York, + 1 (212) 438 7818, email@example.com
- Global oil prices have recently declined largely due to demand-related concerns about recessions and the persistent lockdowns in China due to COVID-19. Nevertheless, oil prices remain supported by many factors, largely on the supply side of the equation. We also believe price volatility will continue, as markets focus on opposing factors and especially as the EU embargoes on Russian seaborne crude oil (Dec. 5, 2022) and products (Feb. 5, 2023) become effective.
- Globally, we expect supply and demand to be broadly balanced in 2023 and into 2024, with Organization for Economic Cooperation and Development commercial crude inventory levels remaining at or near the low end of the five-year averages. Demand and refinery utilization rates are getting close to pre-COVID-19 levels.
44. French LRGs: Tighter Budgets Will Squeeze Capital Spending, Nov. 22, 2022
Hugo Soubrier, Paris, +33 1 40 75 25 79, firstname.lastname@example.org
- France's central government expects local and regional governments (LRGs) to show an aggregate surplus of 0.5% of GDP by 2027, up from break even in 2022, to contribute to general budget cuts.
- A proposed freeze to the LRGs' main central government transfer, coupled with a slowing economy and rising costs (especially payroll and energy) means LRGs will need to trim spending.
- Increased proceeds from the value added tax have offset some operating balance pressures, while LRG liquidity remains robust, and we expect capital expenditure (capex) will recede, meaning we don't expect the funding and budgetary changes will alter our view of French LRGs credit worthiness.
45. Inflation Bolsters German States’ Resilience To Recession, Nov. 10, 2022
Michael Stroschein, Frankfurt, + 49 693 399 9251, email@example.com
- German states' strong 2022 budgetary performance gives them solid footing to face the weaker macroeconomic conditions we expect for 2023-2024.
- We believe elevated inflation will remain a key support to states' budgetary performance over the next few months, since it will boost nominal tax revenue more and ahead of expenditures.
- This, combined with our expectation that debt-brake rules will resume and impose discipline on fiscal decisions in the medium term, provides resilience to our ratings on German states.
- Under a significantly more stressed economic scenario, we anticipate weaker budgetary performance and a moderately higher debt burden for German states, but that most of our ratings on the country's states have capacity to absorb such developments.
Karla Gonzalez, Mexico City, + 52 55 5081 4479, Karla.Gonzalez@spglobal.com
- Although mayoral reelections in Mexico present an opportunity to overcome challenges stemming from political transitions and short-term financial planning, so far they haven't resulted in generalized improved credit quality among our rated entities.
- In our view, the institutional framework and a highly politicized environment prevent systemwide improvements in fiscal sustainability, government accountability, and financial transparency among Mexican municipalities.
- Recent positive rating actions on some municipalities following reelection of their mayors primarily reflected improvements in medium-term financial planning and implementation.
Kurt E Forsgren, Boston, + 1 (617) 530 8308, firstname.lastname@example.org
- We expect U.S. not-for-profit toll road ratings, which were among the most resilient of the transportation infrastructure asset classes, with no downgrades throughout the COVID-19 pandemic, will be stable given the almost complete rebound in traffic during 2022 supported by continued commercial vehicle traffic and toll rate increases implemented by many operators.
- The recovery in traffic and revenues is expected to be accompanied by increased operations and maintenance expenses and a return to capital program spending to expand capacity and continue the conversion to all-electronic toll collection, which accelerated in 2020-2021.
- Toll increases implemented since January 2020 buoyed the credit quality of toll road and bridge operators. Of the 15 largest U.S. toll-backed issuers as measured by debt outstanding, 12 raised toll rates, which in some instances compensated for weaker passenger vehicle traffic. Across the rated universe, the median decline in 2020 operating revenues was approximately 5% less than the decline in transactions.
- A weakening economic outlook could cool the impacts of construction cost inflation and supply chain pressures on capital projects, although the massive federal investment in infrastructure could keep input and labor prices elevated in many markets over the medium term.
- Our analysis of S&P Global Ratings' universe of rated toll road and bridge fiscal 2021 financial metrics--including debt service coverage, debt to EBIDA, and liquidity--shows relatively stable performance with median revenues and toll transaction growth of about 6%, resulting in median debt service coverage of 1.6x in 2021 compared with 1.7x in 2020 and 1.9x in 2019.
Ki Beom K Park, San Francisco, + 1 (212) 438 8493,email@example.com
- Credit stability has been consistent among all U.S. social housing providers (SHPs) mainly due to unprecedented federal response to the pandemic.
- Inflation and rising interest rates, supply-chain issues, labor shortage, and weaker economic prospects are contributing operational challenges and major delays to current development pipelines
- Despite these potential headwinds, we expect ratings to remain stable, with most issuers maintaining a strong enterprise risk profile and solid liquidity position.
- As downside risks remain substantial, SHPs' strategic competence, operational effectiveness, and ability to manage risks are keys to maintain stable credit quality.
Jennifer K Garza (Mann), Dallas, + 1(214) 871 422, firstname.lastname@example.org
- We have surveyed and analyzed 21 local government issuers in Florida and South Carolina that were in the path of Hurricane Ian.
- For most, costs from storm-related damage were minimal.
- We believe credit quality for all 21 issuers remains consistent and is supported by very strong financial profiles and disaster recovery planning initiatives.
50. Market Insights Sector Intelligence | U.S. Public Finance, Nov. 10, 2022
Eden Perry, New York, + 1 (212) 438 0613, email@example.com
- There have been over 1,700 rating actions in U.S. public finance (USPF) since the beginning of the year.
- Upgrades and favorable rating actions continued to outpace unfavorable activity in 2022 across most USPF sectors, with the exception of health care and housing
51. China Property Is Heading For A Transformation, And Maybe A Turnaround, Nov. 21, 2022
Ricky Tsang, Hong Kong, (852) 2533-3575,firstname.lastname@example.org
- China property sales will drop 26%-28% in 2022, and a further 5%-8% in 2023, as highly leveraged private developers continue to struggle.
- A batch of recent government measures will set a floor to the crisis, rebuilding confidence in the sector. These steps will add about Chinese renminbi 1 trillion of fresh liquidity, stopping the downward spiral of developers of higher credit quality.
- The rising dominance of state-owned developers means the market will be slower moving with less offshore issuance; it will also be more stable with more focus on completing unfinished homes.
52. Southeast Asia Property Update: Cautious Growth Ahead, Nov. 21, 2022
Simon Wong, Singapore, +65 65396336, email@example.com
- Muted sales momentum in Indonesia expected ahead as consumer sentiments weaken.
- Credit quality of Indonesia developers is constrained by soft residential sales and refinancing risk.
- In Singapore, commercial real estate should stay resilient, underpinned by manageable supply and healthy demand.
Yilin Lou, Hong Kong, +852 2533 3524, firstname.lastname@example.org
- New securitization issuance dropped by around a third year on year in the first nine months of 2022.
- Issuance of residential mortgage-backed securities (RMBS) remained stalled, while securitization of auto loans also slowed in the third quarter.
- The asset performance of auto-loan asset-backed securities (ABS), RMBS, and credit card ABS that we rate broadly remained low and stable in terms of early delinquencies.
- The early delinquency ratio of certain consumer loan ABS transactions backed by unsecured credit assets apparently deteriorated in the past two quarters.
54. Danish Covered Bond Market Insights 2022, Nov. 22, 2022
Casper R Andersen, Frankfurt, + 49 69 33 999 208,email@example.com
- High household wealth and a solid public finance position should enable the Danish economy to withstand inflationary pressures and expected declining house prices.
- Higher housing costs are driving demand in the interest-only product. Upcoming refinancing of adjustable rate mortgage loans risk large rate increases, which could hamper credit performance.
- Following a significant uptick during the COVID-19 pandemic fueled by low interest rates and high demand, house price growth has slowed down. We expect that further rises in interest rates will put further downward pressure on house prices in the coming years.
55. EMEA Structured Finance Chartbook, Nov. 22, 2022
Andrew South, United Kingdom, + 44 20 7176 3712, +44 (7811) 744597
- Credit Cycle Indicator- Global corporates and households are in the midst of a major credit correction, according to S&P Global Ratings' Credit Cycle Indicator (CCI), a forward-looking signal on credit stress. Following a period of very loose credit conditions and debt buildup, the cycle turned sharply in early 2021 (see chart below). Inflation, rising interest rates, and softening GDP growth in major economies have all had an effect. The indicator suggests that the current downcycle will be felt well into 2023.
- Issuance-Investor-placed securitization issuance for October 2022 was €4.4 billion--only about a quarter of the volume in October 2021. 2 This means that overall issuance for the first 10 months of the year--at €74 billion--was down 25% compared with 2021. By contrast, European benchmark covered bond issuance has been strong this year, reaching €146 billion so far--comfortably more than double the volume recorded in the first 10 months of 2021.
- Rating actions. In October 2022, we raised 14 of our ratings on European securitization tranches, mostly in the CLO and buy-to let RMBS sectors. There were only four downgrades, in CMBS and CLOs.
Natalka H Chevance, New York, + 1 (212) 438 1236, firstname.lastname@example.org
- U.S. lodging performance has rebounded strongly as the effects of the COVID-19 pandemic fade, with overall RevPAR now comfortably exceeding 2019 levels.
- Both conduit and SASB percentage exposures to lodging have increased year over year in 2022; however, the gains may be short-lived given the recent sharp increases in benchmark rates and spreads, and transaction closing costs.
- Loans backing CMBS that were originated before the Federal Reserve's series of rate hikes this year will face a more challenging refinancing environment. For perspective, we explore a sample of our rated book with maturity dates during the next five years, vary the interest rate, and calculate the paydown necessary to achieve a 1.5x debt service coverage.
- While debt service coverage has fallen for most transactions since issuance, a reversion to net cash flow levels at issuance over the next one to two years in light of the sector's strong performance will boost and/or stabilize that metric despite the increase in rates.
57. Technology And Geopolitics: What If The Semiconductor Industry Bifurcates?, Nov. 14, 2022
Terry E Chan, CFA, Melbourne, + 61 3 9631 2174, email@example.com
- The adversarial relationship between the U.S. and China raises the specter of a bifurcation of the global semiconductor industry.
- Such a division would be costly, considering the bill for building just one foundry can rack up to tens of billions of dollars, and take up to a decade to complete.
- This development, in our view, raises quality, reliability and cost risks all along the supply chain.
58. Winter Is Coming For U.S. Tech, Nov. 16, 2022
Christian Frank, San Francisco, + 1 (415) 371 5069, firstname.lastname@example.org
- Fourth-quarter guidance from U.S. tech companies suggests macroeconomic weakness is spreading beyond consumer and PC markets, and inventory corrections are intensifying.
- China lockdowns are weighing on demand across all end markets and bringing fresh supply disruptions.
- U.S. export controls target China's advanced semiconductor industry.
- Downgrade risk is increasing among the non-investment-grade U.S. tech companies we rate due to the weakening macroeconomic environment and rising interest rates.
59. Europe's Remarkable Air Passenger Traffic Recovery Faces A Trickier 2023, Nov. 21, 2022
Rachel J Gerrish, London, + 44 20 7176 6680, email@example.com
- The crucial summer rebound in European airline passenger traffic was stronger than we expected despite well-publicised operational issues.
- However, the industry faces mounting macroeconomic challenges in 2023 as cost inflation escalates, interest rates rise, and disposable incomes come under pressure. Furthermore, if the conflict in Ukraine escalates and/or new COVID-19 variants emerge, this could discourage people from traveling.
- We believe that European traffic for full-year 2022 will be 75%-80% of 2019 levels. We think traffic will remain around, or only slightly above, this range in 2023 before returning closer to pre-pandemic levels in 2024.
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|Primary Credit Analyst:||David C Tesher, New York + 212-438-2618;|
|Secondary Contacts:||Eunice Tan, Hong Kong + 852 2533 3553;|
|Jose M Perez-Gorozpe, Mexico City (52) 55-5081-4442;|
|Paul Watters, CFA, London (44) 20-7176-3542;|
|Joe M Maguire, New York (1) 212-438-7507;|
|Yucheng Zheng, New York + 1 (212) 438 4436;|
|Research Contributor:||Vaishali Singh, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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