- The credit downturn caused by COVID-19 has been abrupt and severe, with a tremendous variance of impact across different corporate sectors.
- Even though the health effects of the pandemic may dissipate sometime in 2021, S&P Global Ratings expects credit measures for some sectors will take longer to fully recover. Part of the reason is a massive increase in new debt issuance, with the year-to-date total of $1.6 trillion, rising 60% over the same period in 2019. Incremental debt used to finance operations could delay the recovery of credit metrics for some sectors beyond simply a recovery in revenue and earnings into 2022, 2023, and beyond.
- In addition, some segments, such as airlines, non-essential retail, and hotels, also face potential longer-term disruption effects, which could impede a recovery. Other sectors, such as pharmaceuticals, telecom, and essential retail, are much less affected.
- The pandemic occurred against a backdrop of already-weak credit measures for most sectors. Ratings remain under pressure, especially in the transportation, media & entertainment, and automotive sectors, which now have 17%, 19% and 30% of ratings, respectively, on CreditWatch with negative implications.
While businesses around the world are starting to reopen, albeit unevenly, after coronavirus-driven lockdowns, S&P Global Ratings expects credit measures for some sectors to take until 2022, 2023, and beyond, to fully recover. Credit measures were weak prior to the pandemic, as demonstrated by the proliferation of low-speculative-grade ratings in non-financial corporates. The global pandemic and oil & gas price collapse and resulting economic recession have led to significant downgrade actions, particularly in the most affected sectors.
In this article, we share our regional recovery estimates by sector for 2020-2021 compared to 2019. In the coming month, we intend to provide an additional Industry Top Trends update for each sector, with more insights on the progress of recovery and what could derail it.
Some industries, notably those that involve groups of people in close proximity (e.g., cruises, airlines, airports, gyms, theaters, restaurants, retail, etc.), may not return to prior levels of revenue for several years. These sectors may face ongoing social distancing rules, leading to capacity restrictions, higher operating expenses, and reluctant consumers until we have widespread vaccination. For example, while consumers may be permitted to fly, ongoing and uncertain restrictions and the loss of confidence by passengers will likely keep air travel below 2019 utilization levels through 2023. More broadly, we expect consumers will make permanent shifts in how they work, shop, and spend their leisure time even after a vaccine becomes available.
For some industries, such as enclosed retail malls, it could be several years, if ever, before credit metrics return to pre-pandemic levels as distancing measures and the recession may accelerate consumers' shift to other channels.
Government intervention, such as paying the wages of millions of furloughed workers, and short-term work programs have dampened the effects of a near halt in business activity in many regions. While we are already seeing service employees returning to work, it may take several years for unemployment levels to return to pre-crisis levels. The pace and stability of employment recovery will feed into consumer sentiment, business confidence, and corporate investment plans.
Many industries that were facing a high degree of fixed costs or drastically lower revenue (or some portion of both) during the virus restrictions were forced to dip into cash balances or borrow to fund operations, the latter being strongly supported by measures from central banks to bolster market liquidity. While revenue for these sectors may recover as soon as next year, a full recovery of credit metrics will take longer as companies dig out of the higher debt load they now carry.
For those regions and sectors where there is a meaningful representation of rated issues, we have estimated when credit metrics might reach a run-rate recovery back to 2019 levels. S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
While we have assumed companies will be interested in restoring credit metrics, there could be more permanent shifts in financial policy that keep incremental debt on the balance sheet longer than currently anticipated. The return to pre-crisis levels of operations and credit metrics is unlikely to be smooth or swift, and will almost certainly result in modifications in how governments, businesses, and consumers behave. We see this risk of modifications as highest for sectors indicated in the regional "Sector Level Impact and Recovery" charts ("LT Industry Disruption/Acceleration"), which could delay or even prevent a return to pre-crisis-level credit metrics.
Regional Heat Maps
For each region, we have assessed the following based on the rated universe of credits:
- The impact of COVID-19, global recession, or the collapse of oil & gas markets in 2020. The impact descriptor (high, moderate, low) is our qualitative view of the degree of impact to the sectors' operations and credit metrics. It does not directly translate to risk of rating actions, which depend on a number of factors, including initial headroom under a rating coupled with the expected length and severity of the crisis.
- 2020 estimates of impact on revenue and EBITDA for the rated universe in the region. Incremental borrowings is a directional estimate of additional debt the sector will carry into next year, which we expect to update and refine over time.
- 2021 estimates of revenue and EBITDA shortfalls relative to 2019 levels. For sectors where we expect revenue and/or EBITDA to be at or better than 2019 levels next year, we use the descriptor '=>2019'.
- Longer term industry disruption/acceleration. For sectors exposed to higher risk of longer term changes in consumer government or corporate consumption patterns or an acceleration of a secular change that could delay or disrupt a recovery of credit metrics, we have marked the sector with 'Yes'.
Asia-Pacific (Contacts: Anthony Flintoff, Xavier Jean)
The climb back has begun in selected countries in Asia-Pacific, but progress is likely to be slow with sporadic setbacks. China has passed the first-wave COVID-19 peak and has gone some way to restarting its economy. Utilization rates in the industrial sector have increased while the service sector is opening at a slightly slower pace, hampered by social distancing rules that look set to remain in force at least for now. Policy stimulus has been building and should provide a tailwind for ongoing recovery through the second half. Operating recovery is likely to take longer in countries such as India and Indonesia, which have not yet seen a peak in the first wave of COVID-19.
EMEA (Contact: Alex Herbert)
Many corporates in EMEA are getting back to business, as lockdown measures in many countries are being eased. This comes after three months of lockdown, where sectors most vulnerable to social distancing--such as retail and leisure--saw activity abruptly halted. Early signs of recovery in Western Europe include higher traffic levels and truck mileage, and improved business confidence. Schools are reopening and cross-border travel restrictions are being lifted. New virus cases in many countries are now far below peak levels, but in some countries, such as Russia, new cases remain relatively high. We see a risk of increased infections as easing progresses, so we expect the recovery to take some time.
Latin America (Contacts: Diego Ocampo, Luis Manuel Martinez)
Most Latin American countries started reopening their economies at the end of May/early June. However, the pace of new infections continues to rise across the region, which means reopening will be very gradual, and consumer and business caution will prevail for several months.
North America (Contacts: Jeanne Shoesmith, Robert Schulz)
With lockdowns easing in many areas of North America (even as COVID-19 cases spike in a number of states in the U.S.), some economic activity has resumed. Much of this is better-measured by non-traditional gauges of activity, such as restaurant-bookings and travel data, than by tried-and-true economic indicators such as factory orders or quarterly GDP--the former are often more forward-looking while the latter tend to quantify what has already happened.
As it stands, the National Bureau of Economic Research has confirmed what we all knew to be true--that the longest-ever expansion in the world's biggest economy, at 128 months, ended in March with the shutdown-driven shock. And while we think this recession could prove to be the shortest on record (even briefer than the six-month slump that ended in July 1980), we continue to expect the recovery to be slow, uneven, and fragile.
This report does not constitute a rating action.
|Primary Credit Analysts:||Jeanne L Shoesmith, CFA, Chicago (1) 312-233-7026;|
|Alex P Herbert, London (44) 20-7176-3616;|
|Secondary Contacts:||Anthony J Flintoff, Singapore (61) 3-9631-2038;|
|Xavier Jean, Singapore (65) 6239-6346;|
|Diego H Ocampo, Buenos Aires (54) 114-891-2116;|
|Luis Manuel Martinez, Mexico City (52) 55-5081-4462;|
|Robert E Schulz, CFA, New York (1) 212-438-7808;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.