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In This List
COMMENTS

Why German Corporates Could Recover Quickly From The COVID-19 Credit Shock

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

Fixed Income in 15 – Episode 12

COMMENTS

Emerging Markets: A Tenuous And Varied Recovery Path

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COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date


Why German Corporates Could Recover Quickly From The COVID-19 Credit Shock

Rated German companies, like others across the world, have been hard hit by the abrupt halt in demand and production resulting from the COVID-19 shock. But they have been less severely affected than many of their regional and international peers. We have so far taken related rating actions on one-quarter of the approximately 110 corporate issuers we rate in Germany, which have aggregated debt of about €1.1 trillion. Rating actions were equally split between downgrades and outlook changes. Since Feb. 8, we have downgraded 17 companies, most of them by one notch. We have placed three more on CreditWatch with negative implications, and downwardly revised the outlook on nine.

Various factors are contributing to the relative resilience of German corporates to the COVID-10 shock, in our view:

  • A corporate landscape with a diverse mix of industries and end markets, and low exposure to retail, restaurants, hotels, and cyclical transport, which are among the industries hardest hit by the pandemic.
  • Strong credit and capital market positions, which are helping companies continue to honor their operational and credit obligations despite the sudden stop in business activity. Year to date, German corporate bond issuance is about double that of the same period of 2019, reaching €36.8 billion as of June 8.
  • Less severe lockdown measures than in other European countries. Many companies were able to reestablish production after about six weeks, or even escape a pause.
  • Strong support through government programs, including short-time working arrangements that protect against layoffs. Although few rated issuers have taken up aid for short-time working, the IFO Institute estimates 7.3 million people are receiving aid from this scheme, which is about 5x the level during the financial crisis.

We expect these strengths will also help speed a recovery of the German corporate sector now that lockdowns are being eased and as economies return to a new normal. Industrial economies, for example, are likely to recover somewhat better than service-oriented industries. They can make up for lost activity more easily than service-oriented businesses such as leisure and tourism, for which the loss of the Easter and early summer season is already a severe burden. Government-supported short-time working has limited a rise in unemployment, potentially encouraging consumer spending and helping businesses react more quickly when business picks up.

Nonetheless, many uncertainties remain over the speed and the magnitude of a recovery. About 31% of ratings in Germany now carry a negative outlook or a CreditWatch Negative (see chart 1), reflecting the risk that their credit quality is likely to deteriorate further under the new normal. Recovery will likely be a longer, tougher climb for companies in the hardest hit industries. The automotive sector, in which over 80% of all ratings globally have been affected, was already suffering from the transformation to environment-friendly vehicles. The outlook for auto demand remains highly uncertain and volatile considering the different impact of COVID-19 on single markets in Europe such as Italy, Spain, the U.K., and France.

Chart 1

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S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

An Economic Shock Less Severe Than The Eurozone Average

German economic growth declined by 2.2% in the first quarter of this year, hit by restrictions to prevent the spread of the COVID-19 virus and weak domestic and global demand. This was the strongest drop in its GDP since 2009, yet it was relatively benign compared to the 3.8% fall for the eurozone as a whole. Two major reasons for this were Germany's less severe social distancing rules than in some other European countries that gave consumers more opportunities to spend money, as well as an economic structure with a smaller contribution from the service sector. Added to this, the German government reacted promptly with bold programs to protect workers and businesses. These included short-time work schemes, which had already proved efficient in protecting jobs during the 2008-2009 global financial crisis (see chart 2). By preventing layoffs, they support household income and help avoid future search costs that slow down business recovery once demand picks up again. More than 11 million employees were registered to the short-time work scheme by May this year (see chart 3), many more than in 2009 as a whole.

Chart 2

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Chart 3

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Germany's manufacturing sector, like others across the world, has suffered not just from the lockdowns of production facilities, but also from disrupted supply chains and muted demand, leading them to stop or drastically reduce their production. This led to a sharp drop in new orders to the German manufacturing sector (see chart 4). However, Purchasing Managers' Index (PMI) data shows the service sector, notably tourism, hospitality, and entertainment, was harder hit by the COVID-19 shock than manufacturing (see chart 5). In 2019, all services contributed 70% of gross value added to the economy in Germany compared with 80% in France and 74% for the eurozone as a whole.

Chart 4

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Chart 5

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The PMI survey also indicates that the economy hit its lowest point in April, with some relief in May. High-frequency data, such as electricity consumption and truck mileage, support this view. Weak new orders at the beginning of the quarter and subdued demand in a context of further restrictions, high uncertainties, and deteriorating financials will weigh on household demand and consequently on business revenues throughout the second quarter. Business surveys by the European Commission estimate the total economy's capacity utilization at 71% for the second quarter, from 83% in Q1. Despite relaxed social distancing measures, we therefore expect Germany's second-quarter GDP to decrease further than in Q1.

Corporate Credit Quality Is Holding Up Better Than International Peers

German corporate credit quality has slipped downward as a result of the COVID-19 shock. But ratings showed greater stability than the regional and global average in the first phase of the COVID-19 shock. On average, we have taken rating actions on 34% of in APAC, 37% in EMEA as a whole, 41% in North America and 72% in Latin America. In Germany, only 27% of ratings have so far been affected, about one-half of them downgrades, the rest CreditWatch and outlook changes. Of the 17 companies we have downgraded since Feb 8, 2020, only three were by more than one notch--the airline Lufthansa, tourism company TUI, and the auto supplier Adler Pelzer. Three further companies are on CreditWatch with negative implications (see table 1).

Table 1

Rating Actions On German Companies Since Feb. 8, 2020*
Date Company Name Industry Action To From
Ratings Lowered
June 11, 2020

Deutsche Bahn AG

Transportation Downgrade AA-/Negative/A-1+ AA/Stable/A-1+
June 9, 2020

Oxea Holding Vier GmbH

Chemicals Downgrade B/Negative/-- B+/Stable/--
June 8, 2020

Tui AG

Hotels and gaming Downgrade, CreditWatch change CCC+/Negative/-- B/-Watch Neg/--
May 20, 2020

Deutsche Lufthansa AG

Transportation Downgrade BB+/Watch Neg/B BBB-/Watch Neg/A-3
May 20, 2020

Nordex SE

Capital goods Downgrade B-/Stable/-- B/Stable/--
May 19, 2020

Adler Pelzer Holding GmbH

Automotive Downgrade, CreditWatch change CCC+/Stable/-- B-/Watch Neg/--
May 14, 2020

Bilfinger SE

Capital goods Downgrade BB-/Stable BB/Stable
May 8, 2020

APCOA Parking Holdings GmbH

Business and consumer services Downgrade B/Stable/-- B+/Stable/--
April 24, 2020

Rohm HoldCo II GmbH

Chemicals Downgrade B-/Stable/-- B/Stable/--
April 17, 2020

Consus Real Estate AG

Real estate Downgrade B-/Stable/-- B/Positive/--
April 3, 2020

ZF Friedrichshafen AG

Automotive Downgrade BB+/Negative/-- BBB-/Negative/--
April 1, 2020

Kirk Beauty One GmbH

Retailing Downgrade CCC+/Negative/-- B-/Stable--
March 31, 2020

Raffinerie Heide GmbH

Energy Downgrade B-/Stable/-- B/Stable/--
March 31, 2020

Robert Bosch GmbH

Automotive Downgrade A+/Negative/A-1+ AA-/Negative/A-1+
March 27, 2020

BMW AG

Automotive Downgrade A/Negative/A-1 A+/Negative/A-1
March 27, 2020

Daimler AG

Automotive Downgrade BBB+/Negative/A-2 A-/Negative/A-2
March 24, 2020

SGL Carbon SE

Capital goods Downgrade CCC+/Stable/-- B-/Negative/--
Ratings On CreditWatch Negative
April 14, 2020

Novem Group GmbH

Automotive Watch Neg B+/Watch Neg/-- B+/Stable/--
03.04.2020

IHO Verwaltungs GmbH

Automotive Watch Neg BBB-/Watch Neg/-- BBB-/Negative/--
25.03.2020

BASF SE

Chemicals Watch Neg A/Watch Neg/A-1 A/Stable/A-1
*As of June 18, 2020.

Speculative-Grade Issuers Are Hard Hit

German companies at the lower end of the rating scale have been harder hit by the COVID-19 shock. More companies have moved from the 'B' to the 'B-' and 'CCC' categories (see chart 6), making them more vulnerable to default. Companies with investment-grade ratings ('BBB-' and above) have shown stability so far, and we have downgraded only two companies from investment grade to speculative grade ('BB+' and below). In speculative-grade territory the picture is different: the number of companies rated 'B-' or lower has risen from 10 at the end of 2019 to 18 now (see table 2). We believe these companies will have to take active measures to improve their liquidity to weather the currently difficult market situation and might lack the necessary financial strength for the recovery, especially if it is prolonged. We therefore expect to see the default rates peaking in 2021. Nevertheless, no rated German company has defaulted so far this year, while globally there have been 91 defaults as of June 4--nearly double the number in the same period of 2019. The majority of defaults so far this year have been in the U.S., where significant oil-price volatility hit companies in the oil and gas sector.

In contrast to the U.S., speculative grade rated companies in Germany are suffering weak capital market access. Only one company, Stada (Nidda BondCo GmbH), has issued debt since the COVID-19 pandemic. However, we expect the market for speculative-grade rated companies to become more active in the second half of 2020 following a stabilization of credit spreads in recent weeks.

Chart 6

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Table 2

Germany-Based Companies With The Highest Risk Of Default ('B-' And Below)
Long-term issuer credit rating* Sector

Adler Pelzer Holding GmbH

CCC+ Auto suppliers

Aenova Holding GmbH

B- Pharmaceuticals

AutoScout24 GmbH

B- Media and entertainment

Consus Real Estate AG

B- Homebuilders and developers

European Optical Manufacturing S.a.r.l.

B- Health-care equipment

GHD Verwaltung GesundHeits GmbH Deutschland GmbH

B- Business and consumer services

Heidelberger Druckmaschinen AG

B- Capital goods

Kirk Beauty One GmbH

CCC+ Retail and restaurants

Nordex SE

B- Capital goods

Raffinerie Heide GmbH

B- Oil and gas refining and marketing

Rohm HoldCo II GmbH

B- Commodity chemicals

Safari Beteiligungs Gmbh

CCC Leisure and sport

SGL Carbon SE

CCC+ Capital goods

Tele Columbus AG

B- Telecom and cable

TUI AG

CCC+ Leisure and sport

VAC Intermediate Holdings BV

B- Capital goods

Wittur International Holding GmbH

B- Capital Goods
*As of June 18, 2020.

Liquidity Is Key To Rating Resilience In The Coronavirus Crisis

German companies' generally good liquidity and ability to access the capital markets and bank lending is helping to defend their credit quality in the COVID-19 pandemic. They typically hold large cash holdings compared with international peers. And they have quickly been able to establish further critical liquidity lines with their relationship banks and actively tapped the capital markets for additional liquidity.

We assess about 24% of German companies as having strong or excellent liquidity, despite the severity of the current situation (see chart 3). This means that we expect these companies to fulfill all obligations in the next two years with their existing liquidity sources and without needing to tap the markets for further liquidity, even if assuming their earnings will drop by 30%-50%. The majority of German companies, by our assessment, have adequate liquidity, signaling that liquidity should last for at least 12 months, even if earnings drop by 25%. We classify only 6% of companies as having insufficient liquidity to cover the next 12 months' liquidity and in need of taking further action to restore and improve that situation.

German corporates are also demonstrating continued access to the capital markets. They issued €36.8 billion in bonds between Jan. 1 and June 8, 2020, compared to €18.4 billion in the same period in 2019 (see table 3). Issuance has been even more oversubscribed than in 2019, by 3.6x, compared to an average of 3.2x in 2019. This demonstrates strong demand from investors for corporate bonds during the pandemic.

Table 3

German Corporates Issued €36.8 Billion In Bonds Year-To-Date June 8, 2020
Average deal size (mil. €) Average coupon (%) Oversubscribed (x) Average maturity (years) Total year to date (bil. €) Full Year (bil. €)
2019 577.1 1.8 3.2 8.7 18.4 64.3
2020 639.9 1.7 3.6 7.3 36.8 --
Source: Dealogic and S&P Global Ratings.

Chart 7

image

Few Rated Companies Have Needed Government Support So Far

Government support programs are providing a diverse set of instruments to support companies of all sizes through the COVID-19 shock. Programs for larger companies, which are the most relevant to companies we rate, contain three main elements of support:

  • The "short-time work" scheme. If 10% of a company's workforce is affected by lack of work available, the state will make up the shortfall to about 70%-87% of employees' net income. This is one of the most beneficial measures, allowing companies to reduce their operating costs effectively and speedily, bridge the lockdown period, and transition to a better demand situation.
  • The WSF ("Wirtschafts Stabilisierungs Fond"). This supports recapitalizations of up to €100 billion. We expect one of the first customers to be Lufthansa, with a request of €6 billion. At this stage, no other rated corporate is tapping this state support mechanism, not least because it comes with many restrictions and a complex approval process up to EU level.
  • The state-owned development bank KfW offers loans to companies, 80% of which it guarantees, therefore requiring only a 20% risk participation by private bank lenders. Overall, €120 billion-€150 billion of loans are available. So far, about 47,000 companies have submitted requests for these loans, and the KfW has granted about €46 billion. The vast majority of recipients are unrated companies without access to capital markets. However, Tui has received a €1.8 billion loan from KfW under this scheme, and Lufthansa and K+S are in talks.

So far, only five companies that we rate have asked for government help under these schemes--Lufthansa, Tui, chemicals manufacturer K+S, and railway company Deutsche Bahn, as well as one unnamed company. All other companies have raised liquidity by tapping the capital markets or taking out additional bank loans from their partner banks.

Related Research

  • COVID-19 Impact: Key Takeaways From Our Articles, June 15, 2020

This report does not constitute a rating action.

Secondary Contact:Tobias Mock, CFA, Frankfurt (49) 69-33-999-126;
tobias.mock@spglobal.com
Economist:Sarah Limbach, Paris + 33 14 420 6708;
Sarah.Limbach@spglobal.com

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