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The ESG Pulse: The Search For A Vaccine


Latin America Structured Finance Outlook 2021: New Issuance Should Increase Amid The Challenging Environment

Take Notes: Private Equity Collateralized Fund Obligations Make An Appearance Amid COVID-19


Santander Hipotecario 2 Spanish RMBS Ratings Raised On Three Classes; Three Classes Affirmed Following Criteria Revision


E-CARAT 9 PLC Class B U.K. Auto ABS Notes Rating Raised; Class A Rating Affirmed

The ESG Pulse: The Search For A Vaccine

Table 1

ESG-Related Rating Actions* April-June 2020
Downgrade CreditWatch negative Outlook revision (downward) Total number of ESG-related rating actions % of ratings impacted by ESG
June April-June June April-June June April-June June April-June April-June
Sovereigns 2 9 0 0 5 29 7 38 20
International Public Finance 2 5 0 0 7 34 9 39 12
US Public Finance 21 45 0 13 5 474 26 532 3
Corporates & Infrastructure 48 268 4 43 20 133 76 448 13
Structured Finance 45 61 137 376 0 0 182 437 1
*Issuer-related actions on global scale ratings, except for structured finance, where numbers represent issue-level actions. The table does not show financial services because we consider the impact of lockdowns and social distancing on financial services ratings to be indirect rather than direct. Note: The table also includes four positive rating actions (two outlook revisions, two upgrades) resulting from increased demand for non-discretionary/food products, recreational vehicles, or reflecting the increased consumption of household sanitization and personal care products, all directly linked to the COVID-19 pandemic and social distancing requirements.

Chart 1


Not surprisingly, the bulk of ESG-related rating actions in June continued to stem from the COVID-19 pandemic, though there were a number related to governance factors. There have been some signs of business restoration in parts of the U.S., as well as in other countries that experienced a COVID surge earlier in the year and where the number of new cases is now tapering off. In contrast, cases have surged in densely populated U.S. states including Florida, California, and Texas, as well as in Mexico, Brazil, Spain, France, and India. This may limit the pace of recovery in 2020 and into 2021, although we currently do not assume further countrywide lockdowns like in April and May in Europe. Rating activity will likely remain elevated in the coming months as we resolve prior CreditWatch placements or update them for new developments. The sectors that are most exposed, in our view, remain leisure, hotels and restaurants, transportation, and governments, especially if there's a resurgence.

At the same time, vaccine developments could accelerate, with production already starting in some cases on the basis of governmental pre-orders, ahead of phase 3 testing results and regulatory approvals. Some experts believe that extensive clinical trial data could be put before regulators by the end of this year. It's estimated that it costs about $2 billion to bring a vaccine to market; GlaxoSmithKline said it had spent about that to develop the avian H5N1 flu vaccine, which it was able to make available in a little over 12 months. The U.S. recently announced a US$2 billion deal with Pfizer and German biotech firm BioNTech for 100 million doses. Other agreements are a $1.6 billion deal with Novavax for 100 million vaccines, or an even lower cost of $1.2 billion for 300 million vaccines with Astrazeneca in cooperation with Oxford University. Most leading vaccine candidates will require more than one dose, with approximately four weeks between doses, meaning that the number of people vaccinated will likely be around half of the number of doses. It implies that under the Pfizer example, patients would have to pay around $20 for each of the two vaccines.

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. As the situation evolves, we will update our assumptions and estimates accordingly.

Chart 2


Sovereigns And International Public Finance

The pandemic continues to weigh on sovereign ratings, but so do governance factors.

Table 2

Sovereigns And International Public Finance ESG-Related Rating Changes
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
June 2020 April-June 2020
Sovereigns 2 0 5 7 9 38 20%
International public finance 2 0 7 9 5 39 11%

The pace of ESG-driven sovereign rating actions slowed down somewhat in June from April and May, with speculative-grade ratings remaining the most affected. The revision of our outlook on Japan back to stable was an exception reflecting reduced financial flexibility. So was the negative outlook revision on Malaysia, which also reflected governance factors, besides COVID-19.

Governance factors were most obvious in the downgrade of Costa Rica, where two finance ministers have stepped down in the past six months. In addition, the pandemic pushed Belize, an already low-rated sovereign, to the verge of default; we lowered the rating to 'CC' and placed it on CreditWatch negative when it announced a likely debt restructuring or missed coupon payment.

Mostly because of the pandemic's devastating effect on output, employment, trade, tourism, and public finances, the rated sovereign universe bias has turned sharply negative (-24 at end June down from +1 at end 2019).

Local and regional government rating and outlook changes were also predominantly sovereign-driven, although the pandemic has added to existing budgetary pressures and contributed to an increasing share of negative outlooks on highly rated Swedish municipalities. The Brussels region joined the ranks of other large capital cities, such as Rome, Paris, London, and Lisbon with earlier negative rating impacts due to the pandemic. These cities' high population densities, sensitivity to travel, consumer spending, tourism, and in some cases the freeze in the property transaction market, continue to hurt them more than other local and regional governments.

Recent governance controversies left the ratings on the African Development Bank (AfDB) unchanged because we found the allegations against the president are being addressed through the appropriate channels and are in line with our adequate governance and management assessment, a level already lower than most supranational peers.

U.S. Public Finance

Despite a gradual reopening of the U.S. economy in June, some U.S. public finance sectors remain pressured by health and safety social risks stemming from the pandemic, leading to multinotch downgrades.

Table 3

U.S. Public Finance ESG-Related Rating Changes*
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
June April-June
TOTAL 21 0 5 26 45 532 3%
State and local governments 11 0 2 13 19 250 2%
Higher education 2 0 1 3 5 156 26%
Health care 2 0 2 4 4 49 10%
Utilities 1 0 0 1 3 29 2%
Housing 1 0 0 1 7 25 7%
Charter schools 0 0 0 0 1 15 4%
Transportation* 4 0 0 4 6 8 3%
*Excludes 187 negative outlook revisions on March 26 on almost all public transportation infrastructure issuers.

Social risks continued to dampen signs of a broader economic rebound, driving health and safety-related rating actions in June across multiple sectors in U.S. public finance. While the number of ESG-driven rating actions was considerably lower--April and May had many outlook revisions--downgrade activity actually increased in June. Local governments experienced 11 downgrades, of which six were multinotch linked to priority-lien bonds secured by hospitality taxes like those levied on hotel rooms for lodging purposes. For example, we downgraded the Washington State Convention Center (WSCC) Public Facilities District in Seattle to 'BBB+' from 'AA-', reflecting a 60% decline in lodging taxes in 2020, with an expectation that collections will not return to pre-pandemic levels until 2024. All events at the convention center were canceled through July 15. The stress in the hospitality sector indicates the precipitous decline in revenue due to canceled or postponed conventions throughout the U.S. until at least 2021 to limit transmission of the virus. The outlooks on these ratings were revised to negative earlier in the year when stay-at-home orders and mobility restrictions were implemented. We remain concerned that, in some instances, a lack of business could result in reserve draws to make debt service payments.

Not-for-profit transportation infrastructure remains another area of continued rating activity, as we lowered the ratings on two parking systems by multiple notches as the bulk of Americans continue working from home. Combined with limited social activities, demand for parking services has significantly hurt financial performance. Furthermore, we downgraded two large hub airports in June consistent with our view of stress in the sector (see "Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure," published June 4, 2020). Despite a modest uptick in passenger volume around Memorial Day, air passenger activity remains approximately 70%-75% below 2019 levels, which will continue to weaken operational and financial metrics.

Finally, several downgrades also took place in higher education and health care. Notable was the multinotch downgrade of student accommodation provider Provident Group-Kean Properties due to the sudden drop in occupancy as students vacated the residence facility following the onset of the COVID-19 pandemic and Kean University transitioned to remote learning.

Corporates And Infrastructure

Hotels, restaurants, leisure, and transportation were most directly affected by COVID.

Table 4

Corporates And Infrastructure ESG-Related Rating Changes
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
June April-June
TOTAL 48 4 20 76 268 448 13%
Transportation and transport infrastructure 9 1 3 13 48 75 41%
Automotive 6 0 2 8 34 70 79%
Hotels and gaming 6 1 3 10 44 61 49%
Media and entertainment 10 2 2 14 36 45 32%
Real estate 0 0 3 3 9 33 20%
Retailing 4 0 1 5 24 33 18%
Aerospace and defense 5 0 1 6 22 29 45%

Since March, we've believed that COVID-19 was not just another crisis and that sectors such as transport, hotels, restaurants, and leisure would be challenged more structurally and for longer, hence the high percentage (40-50%) of ratings affected in these segments from April to June (see table 4). Some high-profile examples include:

  • Transport, notably air traffic and airspace. Downgrades in June include Australia Pacific/Perth/Adelaide airports, Deutsche Bahn, Embraer, and several U.S. airlines.
  • Automotive. Downgrades in June include Mitsubishi Motors, Beijing Automotive, and Delphi Automotive.
  • Media, entertainment, hotels, restaurants, and leisure. Downgrades include InterContinental Hotel Group, Carnival Corp., and Tui, in addition to the default of 24 Hour Fitness

The percentage of ESG-related rating changes for the corporate universe as a whole is considerably lower, at 13%, bearing in mind that we only treat COVID-19 as an ESG credit factor if the impact on the business is direct (see Appendix). The all-in number of rating changes, including indirect impacts from COVID-19, currently stand at just above 20% of all corporate ratings (see "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date").

Finally, we had four positive COVID-19-related rating actions resulting from increased demand for nondiscretionary/food products (e.g. X5 Retail Group and BJ's Wholesale Club Holdings), for recreational vehicles (e.g. Winnebago Industries), and increased consumption of household sanitization and personal care products (e.g. Knowlton Development).

Financial Services

Financial services experienced few direct ESG impacts, even though COVID-19 triggered widespread negative outlook revisions.

While the banking and insurance sectors have seen hardly any rating changes or outlook revisions over April-June directly attributable to ESG factors, they have been susceptible to indirect impacts, namely rising credit risks and financial market volatility resulting from the COVID-19 pandemic. As of the end of June, we took rating actions on about 210 banks that were indirectly related to COVID-19 and the oil shock, accounting for roughly 25% of the total, with about three-quarters being outlook revisions. For the insurance sector, the total was 17% (14% being outlook changes).

Structured Finance

ESG-related rating actions trail underlying corporate credit quality issues.

Table 5

Structured Finance ESG-Related Rating Changes
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
June April-June
Total (all sectors) 45 137 N/A 182 61 437 1%
ABS 1 0 N/A 1 1 40 1%
CMBS 19 97 N/A 116 19 242 9%
Repack* 2 0 N/A 2 16 19 13%
Nontraditional assets** 23 40 N/A 63 25 136 11%
*Repack ratings are weak-linked to the ratings of the underlying securities (and do not include CLOs). **Nontraditional structured finance asset classes include corporate, aircraft, container, railcar, timeshare, small business, and triple-net lease securitizations. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. N/A--Not applicable.

ESG-related rating actions in June continued to be driven by commercial sectors where health and safety considerations have a more direct impact. The most affected have been CMBS with hotel and retail exposure, and whole business securitizations including pubs, fast-food restaurants, and gyms (nontraditional assets; see table 5).

Following initial CreditWatch placements due to the outbreak of COVID-19, there was a pickup in negative rating actions in June with 22 multinotch downgrades and 23 single-notch downgrades. Several of these tranches also remain on CreditWatch negative, leaving 403 tranches affected by COVID-19 on CreditWatch negative as of the end of June.

For collateralized loan obligations we rate, while there have been recent rating actions, we determined that in general COVID-19 did not directly affect ratings given the significant diversification by obligor and industry in the collateral pools.


COVID-19's direct (ESG) versus indirect (non-ESG) impact

We consider the COVID-19 pandemic a social credit factor when we believe health concerns and social distancing measures have a direct impact on an entity's activities. Put differently, our data presented here exclude rating actions stemming from the recession triggered by the pandemic, and from the downturn in oil and gas that started before the COVID-19 outbreak and is tied to oversupply and a price war. For sovereign ratings, however, we see the pandemic's direct and indirect macroeconomic, fiscal, and external impacts as intertwined and feeding into each other, and therefore consider rating actions triggered by the COVID-19-induced recession as health and safety-related.

For the broader statistics of COVID-19 and oil-related downgrades, see "COVID-19 Activity In U.S. Public Finance," "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date," and "COVID-19 Activity In Global Structured Finance ."

We have tagged rating actions tied directly to health and safety concerns as ESG-driven:  One of the clearest examples is airlines, which have seen a significant drop in demand due to travel restrictions to stop the spread of the virus. Other examples include auto dealers, which were forced to close their doors due to social distancing requirements, resulting in lost sales for auto manufacturers. Movie theaters, airports, restaurants and leisure activities were/have been shut down due to the virus and local requirements for social distancing, resulting in a total cessation of revenue streams and limitations on large and social gatherings.

For the purposes of classifying ESG impacts, we excluded indirect rating actions tied to the recession triggered by the COVID-19 pandemic:   For example, the recession may ultimately increase the risk of nonpayments for banks or depress asset values, affecting insurers. While important, we have not flagged these as ESG. Similarly many corporate sectors are indirectly affected, for instance many consumer products companies have had to reduce their advertising, thereby affecting many media companies. Also, job losses and loss of consumer confidence has stopped buyers from making large consumer products purchases.

Related Research

ESG in ratings industry-related commentaries
Sovereigns and supranationals:
International public finance:
U.S. public finance:
Corporates and infrastructure:
Structured finance:
ESG in ratings criteria-related commentaries


Sovereigns and local and regional governments: 

U.S. public finance: 

Corporates and infrastructure: 



Structured finance: 

This report does not constitute a rating action.

Primary Credit Analysts:Karl Nietvelt, Paris (33) 1-4420-6751;
Nicole Delz Lynch, New York (1) 212-438-7846;
Patrice Cochelin, Paris (33) 1-4420-7325;
Nora G Wittstruck, New York (1) 212-438-8589;
Matthew S Mitchell, CFA, London (44) 20-7176-8581;
Michael Wilkins, London (44) 20-7176-3528;
Kurt E Forsgren, Boston (1) 617-530-8308;
Secondary Contacts:Emmanuel F Volland, Paris (33) 1-4420-6696;
Lawrence A Wilkinson, New York (1) 212-438-1882;
Dennis P Sugrue, London (44) 20-7176-7056;
Peter Kernan, London (44) 20-7176-3618;
Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670;
Jesus Palacios, Mexico City (52) 55-5081-2872;
Bertrand P Jabouley, CFA, Singapore (65) 6239-6303;
Timucin Engin, Dubai (971) 4-372-7152;

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