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COMMENTS

Credit Trends: Potential Fallen Angels Hit A Record-High 111


Credit Trends: Potential Fallen Angels Hit A Record-High 111

So far in 2020, fallen angels (issuers downgraded to speculative grade from investment grade) total 24, with over $300 billion in rated debt (as of April 30). By comparison, this is the highest volume for fallen angels since 2015, when the Brazilian and Russian sovereigns, OAO Gazprom, Petrobras, and other related issuers accounted for nearly $1 trillion in fallen angel debt. In addition, pressure continues to build on 'BBB-' rated issuers. The number of potential fallen angels has risen to a record 111 issuers globally, compared with 96 in our last report. Potential fallen angels are issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications,

The negative bias for all investment-grade issuers--the proportion with negative outlooks or ratings on CreditWatch negative--rose to a post-financial crisis high of 25%, signaling an increase in credit pressure, even for comparatively strong issuers, as COVID-19, economic ramifications from social distancing policies, and a sharp drop in oil prices run their course.

Potential fallen angels are significant because the loss of investment-grade ratings typically carries both higher capital costs and sometimes the need to revise contracts with bondholders to protect investors (further adding to capital costs), or worse, could lead to the sale of the bonds in favor of more creditworthy companies. Of the 17 additions to the potential fallen angels list since our last report, seven are financial institutions, four are utilities, and one each in aerospace and defense, consumer products, media and entertainment, metals and mining, real estate, and transportation.

Chart 1

image

The most recent fallen angel, Hillenbrand Inc., a U.S. industrial manufacturer, occurred when S&P Global Ratings downgraded the issuer to 'BB+' from 'BBB-' because of the impact of the economic contraction stemming from COVID-19-related measures. This would increase the company's debt leverage, thus delaying its deleveraging following its acquisition of Milacron Holdings Corp. The rating outlook remains negative because of the potential for weaker demand, further pressuring cash flows (see "Hillenbrand Inc. Downgraded To ‘BB+’ As The Economic Slowdown Delays Its Deleveraging, Outlook Negative," April 21, 2020).

S&P Global Ratings also put its ratings on BlackRock TCP Capital on CreditWatch negative on March 24, 2020. However, in March, the issuer requested that the ratings be withdrawn. Following procedure, S&P Global Ratings waited 30 days to withdraw the rating, and prior to withdrawing, resolved the CreditWatch on April 24, 2020, by downgrading to 'BB+', with a stable outlook, from 'BBB-', reflecting its expectation that COVID-19 would increase credit losses and calls on liquidity to fund commitments, as well as worsen financing conditions (see "BlackRock TCP Capital Downgraded To ‘BB+’ On Expected Decline In Operating Results Due To COVID-19; Ratings Withdrawn," April 25, 2020).

Potential Fallen Angels Reach All-Time Highs

The precipitous rise in potential fallen angels comes as COVID-19, a deep and sudden dislocation of oil prices, and weak revenue prospects hurt a variety of corporations. Although, downgrades have disproportionately affected speculative-grade issuers, which is expected considering their typically more aggressive financial positions and higher susceptibility to market volatility.

Of the 17 additions to the potential fallen angels list, seven were financial institutions, as some banking systems could be significantly affected by COVID-19-related stresses despite highly supportive monetary policies globally.

In particular, S&P Global Ratings revised its outlooks on three Irish banks to negative following a downward revision of the Banking Industry Country Risk Assessment (BICRA) industry risk trend to negative for Ireland. Despite existing extraordinary fiscal and monetary support and our expectation for a gradual recovery in the Irish economy starting in the third quarter, prolonged weakness could further weigh on banks' ability to generate structural profitability and their asset quality (see "Outlooks Revised On Three Irish Banks On Deepening COVID-19 Downside Risks," April 29, 2020).

Chart 2

image

Similarly, S&P Global Ratings revised its outlooks on two Indian banks rated 'BBB-'--Axis Bank Ltd. and ICICI Bank Ltd.--to negative after the BICRA economic risk trend was revised downward to negative on the likely deterioration of asset quality and profitability as well as an increase in credit costs due to COVID-19. These could slow down the recovery of the banking system by about a year (see "Rating Actions On Some Indian Banks As Operating Conditions Worsen; Government Support Key For State-Owned Entities," April 17, 2020).

Meanwhile, the same rationale led to negative outlooks on four Indian nonbank financial institutions (and one downgrade), of which two were 'BBB-' (see "Various Rating Actions Taken On Indian NBFCs On Weakening Economic Conditions Due To COVID-19," April 17, 2020). This led to Power Finance Corp. Ltd. being added to the potential fallen angels list. S&P Global Ratings revised its outlook on Bajaj Finance Ltd. to negative and affirmed its 'BBB-' rating. However, we did not include it in the list of potential fallen angels because the list consists of companies with outstanding, rated public issuance.

Virgin Money U.K. was also added to the list of potential fallen angels, after S&P Global Ratings revised its outlook on the bank to negative and affirmed the rating, mainly because of increased economic risk (see "Virgin Money And Clydesdale Outlooks Revised To Negative On Economic Impact Of COVID-19; Ratings Affirmed," April 23, 2020). The BICRA for the U.K. has a negative economic risk trend. Also, we estimate systemwide domestic credit losses will rise to more than four times their 2019 level as a result of the radically more negative environment due to the COVID-19 pandemic. Consumer credit is likely to contribute most of the credit losses, followed by corporate loans in the most affected sectors. A deterioration in asset quality could pressure bank ratings should the economic contraction protract (see "COVID-19 Effects Might Quadruple U.K. Bank Credit Losses In 2020," May 4, 2020).

Four utilities were also added to the list of potential fallen angels since our last report, of which two were Indonesian. The outlook on PT Perusahaan Gas Negara (PGN) was revised to negative--reflecting the outlook on the Indonesia sovereign rating--which also affected PGN's parent, PT Pertamina. Nonetheless, S&P Global Ratings continues to expect the company to receive extraordinary support from the government if required, through its parent (see "PT Perusahaan Gas Negara 'BBB-' Ratings Affirmed On Ability To Withstand Lower Cash Flows; Outlook Negative," April 27, 2020).

In contrast, S&P Global Ratings revised its outlook on PT Pelabuhan Indonesia III to negative because it sees a lower likelihood of extraordinary government support for government-related entities that it does not consider essential (see "Various Rating Actions Taken After Reassessment Of Support For Indonesian Government-Related Entities," April 27, 2020).

Chart 3

image

Nearly One-Quarter Of Potential Fallen Angels Are On CreditWatch Negative

Crucially, 26 of the 111 potential fallen angels have ratings on CreditWatch negative, which carries a shorter timeline for potential downgrades (within 90 days) compared with a negative outlook (two years). The record-high number of issuers with ratings on CreditWatch negative indicates the fragility of credit conditions amid the economic and financial pressures from COVID-19 (see chart 4).

Chart 4

image

Of these, seven are in lodging and leisure. We had highlighted this sector in our last report, noting that restrictions on travel and consumer activity are causing significant declines in revenue (see "Various Ratings Actions Taken On 34 Companies In The Lodging And Leisure Sector," March 21, 2020).

The auto sector comes in second in the number of potential fallen angels with ratings on CreditWatch negative, with four (half of the sector's total potential fallen angels). The sharp decrease in global demand due to the recession led S&P Global Ratings to expect global light-vehicle sales to drop 15%-20% in 2020, which could lead to weakening credit quality for automakers. A number of manufacturers already have shut down plants across the globe (see "COVID-19 Will Batter Global Auto Sales And Credit Quality," March 23, 2020). Importantly, this comes in a context of a gloomy industry outlook, with weakening auto sales across regions and rising negative ratings bias in the pre-COVID-19 world (see "Industry Top Trends 2020: Autos," Nov. 18, 2019).

Chart 5

image

Although financial institutions have the most potential fallen angels, the sector only comes in fifth in terms of issuers on CreditWatch negative, pointing to a less immediate risk of downgrade. Nevertheless, specific financial institutions most exposed to sectors affected by COVID-19 are vulnerable to credit losses and subsequent downgrade pressures.

The Ratio Of Fallen Angels To Total Investment-Grade Issuers Surpasses Its 10-Year Average…

Fallen angels this year have already surpassed the full-year 2019 total, which has led to a spike in the ratio of fallen angels to total investment-grade issuers. The ratio reached 1.9% as of April 30, 2020, surpassing its 10-year-trailing average for the first time since December 2016 (see chart 6). With 111 potential fallen angels, 26 of which are on CreditWatch negative, there is a possibility of this ratio climbing significantly higher.

Chart 6

image

…While The Jump In Financing Costs Of Being Downgraded To Speculative Grade Remains Elevated

The difference in option-adjusted spreads for U.S. corporate entities rated 'BBB-' and 'BB+' (in basis points) reflects the increase in financing costs when being downgraded to 'BB+' from 'BBB-' (see chart 7). With risk aversion still relatively high, this difference peaked at 284 bps toward the end of March, higher than the peak during the financial crisis (247 bps). While it has eased since then, it remains elevated at 234 bps as of April 30.

Chart 7

image

Table 1

Six Fallen Angels In April Take The Overall Count For 2020 To 24
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
4/20/2020

Hillenbrand Inc.

BB+ BBB- Capital goods U.S. 1,250
4/10/2020

Rockies Express Pipeline LLC

BB+ BBB- Midstream U.S. 2,050
4/9/2020

Renault S.A.

BB+ BBB- Automotive France 24,979
4/3/2020

ZF Friedrichshafen AG

BB+ BBB- Automotive Germany 7,027
4/2/2020

Service Properties Trust

BB+ BBB- Homebuilders/real estate companies U.S. 5,350
4/2/2020

Royal Caribbean Cruises Ltd.

BB BBB- Media and entertainment U.S. 1,750
3/27/2020

Continental Resources Inc.

BB+ BBB- Oil and gas U.S. 5,200
3/27/2020

Esselunga SpA

BB+ BBB- Retail/restaurants Italy 1,105
3/27/2020

Trinidad Generation Unlimited

BB+ BBB- Power Trinidad and Tobago 600
3/26/2020

Apache Corp.

BB+ BBB Oil and gas U.S. 11,080
3/26/2020

Western Midstream Operating LP (Occidental Petroleum Corp.)

BB+ BBB- Midstream U.S. 8,120
3/26/2020

Marks & Spencer PLC (Marks & Spencer Group PLC)

BB+ BBB- Retail/restaurants U.K. 2,068
3/26/2020

Patterson-UTI Energy Inc.

BB+ BBB Oil and gas U.S. 875
3/25/2020

Ford Motor Co.

BB+ BBB- Automotive U.S. 113,862
3/25/2020

Occidental Petroleum Corp.

BB+ BBB Oil and gas U.S. 43,913
3/24/2020

Delta Air Lines Inc.

BB BBB- Transportation U.S. 4,550
3/23/2020

Immobiliare Grande Distribuzione SIIQ S.p.A.

BB+ BBB- Homebuilders/real estate companies Italy 855
2/24/2020

Ruby Pipeline LLC

BB BBB- Midstream U.S. 825
2/18/2020

Macy's Inc.

BB+ BBB- Retail/restaurants U.S. 7,149
2/14/2020

Kraft Heinz Co. (The)

BB+ BBB- Consumer products U.S. 31,539
2/4/2020

EQM Midstream Partners LP

BB+ BBB- Midstream U.S. 3,500
2/3/2020

EQT Corp.

BB+ BBB- Oil and gas U.S. 4,945
1/31/2020

Spirit AeroSystems Inc.

BB BBB- Aerospace and defense U.S. 1,900
1/13/2020

Atlantia SpA

BB- BBB- Transport infrastructure Italy 16,297
Data as of April 30, 2020. Fallen angels are investment-grade issuers currently with bonds outstanding that have been downgraded to speculative grade (i.e., from 'BBB-' or above to 'BB+' or below). Source: S&P Global Ratings Research.

Table 2

Potential Fallen Angels At All-Time High Of 111
'BBB-' rated issuers with negative outlooks or ratings on CreditWatch negative
Subsector Issuer CreditWatch negative/negative outlook New to the list this month Country Debt amount (mil. US$)
Transport Infrastructure

Abertis Infraestructuras S.A.

Negative Spain 14,737
Lodging and leisure

Accor S.A.

Negative France 5,036
Financial institutions

AIB Group PLC

Negative Yes Ireland 5,005
Oil and gas

Aker BP ASA

Negative Norway 3,150
Chemicals, packaging, and environmental services

Alpek S.A.B. de C.V.

Negative Mexico 1,450
Insurance

American Equity Investment Life Holding Co.

Negative U.S. 900
Metals, mining, and steel

ArcelorMittal

Negative Luxembourg 14,801
Financial institutions

Argo Group US Inc.

Negative U.S. 125
Capital goods

Ashtead Group PLC

Negative U.K. 3,000
Retail/restaurants

Auchan Holding

Negative France 7,447
Automotive

AutoNation Inc.

Negative U.S. 1,500
Transportation

Aviation Capital Group LLC

Negative Yes U.S. 4,028
Transportation

Avolon Holdings Ltd.

Negative Cayman Islands 10,649
Financial institutions

Axis Bank Ltd.

Negative Yes India 1,895
Financial institutions

Bank of Ireland Group PLC

Negative Yes Ireland 6,150
Homebuilders/real estate companies

Beijing Capital Group Co. Ltd.

Negative China 500
Telecommunications

Bharti Airtel Ltd.

Negative India 4,319
Chemicals, packaging, and environmental services

Braskem S.A.

Negative Brazil 4,900
Financial institutions

BrightSphere Investment Group Inc.

Negative U.S. 400
Transportation

British Airways PLC

Watch Neg U.K. 806
Homebuilders/real estate companies

Brookfield Property REIT Inc.

Negative U.S. 13,700
Lodging and leisure

Brunswick Corp.

Watch Neg U.S. 832
Metals, mining, and steel

Cameco Corp.

Negative Canada 714
Retail/restaurants

Capri Holdings Ltd.

Negative British Virgin Islands 450
Lodging and leisure

Carnival Corp.

Watch Neg Panama 8,176
Forest products and building materials

Celulosa Arauco y Constitucion, S.A. (ARAUCO)

Negative Chile 3,900
Oil and gas

Cenovus Energy Inc.

Negative Canada 4,824
Homebuilders/real estate companies

China Jinmao Holdings Group Ltd.

Negative Hong Kong 1,727
Lodging and leisure

Choice Hotels International Inc.

Negative U.S. 800
Oil and gas

Cimarex Energy Co.

Negative U.S. 2,000
Homebuilders/real estate companies

Citycon Oyj

Negative Finland 2,429
Consumer products

Conagra Brands Inc.

Negative U.S. 13,816
Retail/restaurants

Darden Restaurants Inc.

Negative U.S. 1,250
Transportation

Deutsche Lufthansa AG

Watch Neg Germany 1,085
Oil and gas

Devon Energy Corp.

Negative U.S. 7,550
Oil and gas

Diamondback Energy Inc

Negative U.S. 5,935
Homebuilders/real estate companies

DIFC Investments Ltd.

Negative United Arab Emirates 1,400
Forest products and building materials

Eagle Materials Inc.

Watch Neg U.S. 350
Oil and gas

Ecopetrol S.A.

Negative Colombia 7,850
Homebuilders/real estate companies

Emaar Properties PJSC

Watch Neg United Arab Emirates 3,250
Aerospace and defense

Embraer S.A.

Watch Neg Brazil 500
Utilities

Empresa Nacional del Petroleo

Negative Yes Chile 2,980
Midstream

Enable Midstream Partners L.P.

Negative U.S. 1,850
Homebuilders/real estate companies

EPR Properties

Negative U.S. 3,486
Lodging and leisure

Expedia Group Inc.

Negative Yes U.S. 7,705
Financial institutions

FCE Bank PLC

Watch Neg U.K. 9,709
Financial institutions

Financiera de Desarrollo Territorial S.A. FINDETER

Negative Colombia 500
Metals, mining, and steel

Gerdau S.A.

Negative Yes Brazil 3,150
Automotive

GKN Holdings Ltd.

Negative U.K. 933
Diversified

Grupo de Inversiones Suramericana S.A.

Negative Colombia 850
Utilities

Grupo Energia Bogota S.A.E.S.P.

Negative Colombia 1,070
Oil and gas

Hess Corp.

Negative U.S. 7,600
Lodging and leisure

Host Hotels & Resorts Inc.

Watch Neg U.S. 4,450
Aerospace and defense

Howmet Aerospace Inc

Negative Yes U.S. 6,982
Lodging and leisure

Hyatt Hotels Corp.

Watch Neg U.S. 2,100
Financial institutions

ICICI Bank Ltd.

Negative Yes India 3,697
Automotive

IHO Verwaltungs GmbH

Watch Neg Germany 8,239
Merchant Power

Innergex Renewable Energy Inc.

Negative Canada 114
Midstream

Inter Pipeline Ltd.

Negative Canada 3,411
Transportation

International Consolidated Airlines Group S.A.

Watch Neg Spain 1,085
Media and entertainment

ITV PLC

Negative U.K. 1,844
Retail/restaurants

Kingfisher PLC

Watch Neg U.K. 54
Retail/restaurants

Kohl's Corp.

Negative U.S. 2,600
Lodging and leisure

Las Vegas Sands Corp.

Watch Neg U.S. 9,500
Automotive

Lear Corp.

Negative U.S. 2,950
Oil and gas

Marathon Oil Corp.

Negative U.S. 5,252
Lodging and leisure

Marriott International Inc.

Watch Neg U.S. 9,337
Capital goods

Metso Corp.

Watch Neg Finland 434
Metals, mining, and steel

Minsur S.A.

Watch Neg Peru 450
Consumer products

Molson Coors Beverage Co.

Negative U.S. 7,625
Oil and gas

National Fuel Gas Co.

Negative U.S. 2,154
Financial institutions

Nelnet Inc.

Negative U.S. 200
Consumer products

Next PLC

Watch Neg U.K. 1,399
Automotive

Nexteer Automotive Group Ltd.

Watch Neg Cayman Islands 250
Oil and gas

Noble Energy Inc.

Negative U.S. 5,884
Retail/restaurants

Nordstrom Inc.

Negative U.S. 3,566
Consumer products

Ocean Spray Cranberries Inc.

Negative U.S. 150
Financial institutions

Ohio National Financial Services Inc.

Negative U.S. 1,275
Oil and gas

Ovintiv Inc.

Negative U.S. 6,450
Financial institutions

Permanent TSB PLC

Negative Yes Ireland 8
Automotive

Peugeot S.A.

Negative France 8,463
Forest products and building materials

PotlatchDeltic Corp.

Negative U.S. 1,752
Financial institutions

Power Finance Corp. Ltd.

Negative Yes India 400
Financial institutions

Prospect Capital Corp.

Watch Neg U.S. 5,592
Utilities

PT Pelabuhan Indonesia III (Persero)

Negative Yes Indonesia 500
Utilities

PT Perusahaan Gas Negara Tbk.

Negative Yes Indonesia 1,975
Utilities

Puget Energy Inc.

Negative U.S. 6,078
Consumer products

PVH Corp.

Negative U.S. 2,658
High technology

Rakuten Inc.

Negative Japan 800
Sovereign

Republic of Colombia

Negative Colombia 25,265
Homebuilders/real estate companies

Retail Opportunity Investments Corp.

Negative Yes U.S. 500
Sovereign

Romania

Negative Romania 33,531
Lodging and leisure

SKYCITY Entertainment Group Ltd.

Watch Neg New Zealand 318
Consumer products

Steelcase Inc.

Watch Neg Yes U.S. 450
Consumer products

Suedzucker AG

Negative Germany 1,627
Forest products and building materials

Suzano S.A.

Negative Brazil 5,300
Consumer products

Sysco Corp.

Watch Neg U.S. 12,767
Lodging and leisure

Tabcorp Holdings Ltd.

Negative Australia 1,509
Financial institutions

Tanner Servicios Financieros S.A.

Negative Chile 436
Consumer products

Tapestry Inc.

Negative U.S. 1,600
High technology

Tech Data Corp.

Watch Neg U.S. 1,750
Transportation

Trinity Industries Inc.

Negative U.S. 400
Metals, mining, and steel

Vale S.A.

Negative Brazil 7,450
Automotive

Valeo S.A.

Watch Neg France 3,830
Financial institutions

Virgin Money UK PLC

Negative Yes U.K. 3,986
High technology

VMware Inc.

Negative U.S. 6,000
Forest products and building materials

West Fraser Timber Co. Ltd.

Negative Canada 300
Utilities

Yangzhou Urban Construction State-owned Assets Holding (Group) Co. Ltd.

Negative Yes China 300
Homebuilders/real estate companies

Yuexiu Real Estate Investment Trust

Negative Hong Kong 400
Automotive

Zhejiang Geely Holding Group Co. Ltd.

Watch Neg China 2,992
Metals, mining, and steel

Zijin Mining Group Co. Ltd.

Negative China 350
Data as of April 30, 2020. Potential fallen angels are issuers rated 'BBB-' by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications, and currently have bonds outstanding. Source: S&P Global Ratings Research.

Table 3

Fallen Angel Downgrades In 2020
Rating BB+ BB BB- B+ B B- CCC/C D
AAA 0 0 0 0 0 0 0 0
AA+ 0 0 0 0 0 0 0 0
AA 0 0 0 0 0 0 0 0
AA- 0 0 0 0 0 0 0 0
A+ 0 0 0 0 0 0 0 0
A 0 0 0 0 0 0 0 0
A- 0 0 0 0 0 0 0 0
BBB+ 0 0 0 0 0 0 0 0
BBB 13 0 0 0 0 0 0 0
BBB- 67 17 4 0 0 0 0 0
Data as of April 30, 2020. Fallen angels are investment-grade issuers currently with bonds outstanding that have been downgraded to speculative grade (i.e., from 'BBB-' or above to 'BB+' or below). Source: S&P Global Ratings Research.

Related Research

  • COVID-19 Effects Might Quadruple U.K. Bank Credit Losses In 2020, May 4, 2020
  • Outlooks Revised On Three Irish Banks On Deepening COVID-19 Downside Risks, April 29, 2020
  • PT Perusahaan Gas Negara 'BBB-' Ratings Affirmed On Ability To Withstand Lower Cash Flows; Outlook Negative, April 27, 2020
  • Various Rating Actions Taken After Reassessment Of Support For Indonesian Government-Related Entities, April 27, 2020
  • BlackRock TCP Capital Downgraded To 'BB+' On Expected Decline In Operating Results Due To COVID-19; Ratings Withdrawn, April 25, 2020
  • Virgin Money And Clydesdale Outlooks Revised To Negative On Economic Impact Of COVID-19; Ratings Affirmed, April 23, 2020
  • Hillenbrand Inc. Downgraded To 'BB+' As The Economic Slowdown Delays Its Deleveraging, Outlook Negative, April 21, 2020
  • Rating Actions On Some Indian Banks As Operating Conditions Worsen; Government Support Key For State-Owned Entities, April 17, 2020
  • Various Rating Actions Taken On Indian NBFCs On Weakening Economic Conditions Due To COVID-19, April 17, 2020
  • Fallen Angels Rose Sharply In First-Quarter 2020 Amid COVID-19 And Oil Price Shocks, April 16, 2020
  • COVID-19 Will Batter Global Auto Sales And Credit Quality, March 23, 2020
  • Various Ratings Actions Taken On 34 Companies In The Lodging And Leisure Sector, March 21, 2020
  • Industry Top Trends 2020: Autos, Nov. 18, 2019

This report does not constitute a rating action.

Credit Markets Research:Sudeep K Kesh, New York (1) 212-438-7982;
sudeep.kesh@spglobal.com
Vincent R Conti, Singapore + 65 6216 1188;
vincent.conti@spglobal.com
Sarah Limbach, Paris + 33 14 420 6708;
Sarah.Limbach@spglobal.com
Research Contributor:Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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