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COMMENTS

The ESG Pulse: COVID-19 Vaccine Hope As Second Wave Sets In

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

NEWS

SLIDES Published: Italian Corporates In The COVID-19 Era: First Steps On A Steep Recovery Path

COMMENTS

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

COMMENTS

Elevated EBITDA Addbacks Are A Continuing Trend


The ESG Pulse: COVID-19 Vaccine Hope As Second Wave Sets In

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U.S.-based Pfizer Inc. and German partner BioNTech announced last week that the first interim analysis of the phase-3 clinical trial for their COVID-19 vaccine (with more than 40,000 participants) found it was more than 90% effective in preventing COVID-19 and there were no serious side effects observed. More positive news came when U.S. biotechnology company Moderna announced its vaccine was 94.5% effective in a phase-3 study involving 30,000 participants.

We understand that initially vaccines will be made available to vulnerable populations (which represent a disproportionate share of severe cases) and will substantially reduce the case fatality ratio. Pfizer and Moderna aim to produce 50 million and 25 million vaccine doses, respectively, by end-2020. For 2021 they announced production targets of 1.3 billion units (Pfizer) and 500 million (Moderna), noting that two doses per person are needed.

There are also competing vaccines, based on different technologies, not far behind in the development pipeline, including those in late-stage trials at Johnson & Johnson, AstraZeneca, Merck, Sanofi, GSK, as well as over 100 others in various stages of development (see "What Does Pharma's Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?," published July 8, 2020, on RatingsDirect).

The vaccines are obviously a very positive development, not least because of the extremely high effectiveness rates. They herald, however, only the first step toward a return to social and economic normality; taking into account approval, production, and distribution hurdles, we continue to assume that effective immunization could be widely available by the middle of next year. We recognize the high degree of uncertainty associated with the pandemic and any vaccine roll-out, which will require us to update our assumptions as the situation evolves.

On the other hand, the recent surge in cases--bringing about a second wave of lockdowns in Europe and additional restrictions in many U.S. states--is likely to make things worse for certain industries before they get better. For instance, the resulting delayed recovery in air traffic volumes means we expect 2021 air traffic and revenues to be down by 40%-60% (compared to 2019), which is worse than we previously anticipated and comes on top of volumes plummeting by 65%-80% this year. We expect air traffic to match 2019 volumes only by 2024 as past positive trends in global mobility and rising middle class demand will be dampened by the global recession. Airlines may need to implement new strategies if, as we expect, business travel permanently declines as virtual meetings and working remotely are increasingly seen as effective options (see "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," published Nov. 12, 2020).

Our assumption that an effective immunization becomes widely available only by the middle of next year factors in:

  • Regulatory approvals: Further review of data will be needed. Apart from the U.S. Food and Drug Administration (FDA), other regulators will also need to approve the COVID-19 vaccine. The FDA cautioned that it will seek evidence that the vaccine reduces the number of severe cases (typically occurring among those with a weaker immune system) in order to approve. Although it is not yet known whether Pfizer's vaccine is effective in this subgroup, Moderna has said that in its trials, 11 severe cases of COVID-19 occurred only in the placebo group, with none in the vaccinated group, pointing to high efficacy in preventing severe cases.
  • Distribution and production: Distribution challenges are particularly relevant in the case of Pfizer's vaccine, which requires extremely cold storage (minus 70 degrees Celsius) throughout the supply chain. This is a disadvantage versus Moderna's vaccine, which is said to be stable for 30 days at 2-8 degrees Celsius (and up to six months at minus 20 degrees Celsius). Production ramp-up will also be a key area of focus with Pfizer and Moderna indicating a total 2021 production target that could protect close to 1 billion people.
  • Effectiveness and longevity of the vaccine: How long the vaccine will protect patients, notably the elderly and vulnerable, is a particular uncertainty for mRNA vaccines. Positively, experts assess the vaccine's mutation risk as low. Although mRNA vaccines have been in development for many years, nobody has deployed one successfully. It is based on encoding genetic instructions to create part of the virus (specifically the spiky protein at the surface of the corona virus); when the vaccine is injected, cells start to produce the protein and the immune system develops, ensuring a response ahead of getting in contact with the real virus.
  • Safety and acceptance by the public. While trials have so far shown very limited serious side-effects, some people may prefer to wait to be vaccinated until evidence has built up, while anti-vaxxers, who may simply refuse to take part, could represent a substantial percentage of the population. The mRNA technology has the advantage that it should be safer than some other vaccine technologies given that it is not produced from weakened versions of a virus.
  • Global coordination, accessibility, and affordability: To allow for a lasting and global return to normality, a global containment strategy is likely needed. Easier said than done, not least given that vaccines will need to be affordable for developing markets. Positives nonetheless are the 90%-plus effectiveness rates and ongoing improvements in therapeutics, which help to reduce fatality rates.

Sovereigns And International Public Finance

How sovereign ratings will hold up against health and safety pressures continues to depend largely on governance strength

Table 1

Sovereign ESG-Related Rating Actions
September Apr-Sept % of total ratings affected
Downgrade 3 11
CreditWatch negative 0 0
Outlook revision 4 38
Total ESG-related rating actions 7 51 25
Data is as of Sept. 30, 2020. Source: S&P Global Ratings. ESG--Environmental, social, and governance.

Table 2

International Public Finance ESG-related rating actions
September Apr-Sept % of total ratings affected
Downgrade 2 6
CreditWatch negative 0 1
Outlook revision 12 50
Total ESG-related rating actions 14 57 17
Data is as of Sept. 30, 2020. Source: S&P Global Ratings. ESG--Environmental, social, and governance.

Our recent outlook revision to negative on Spain overshadowed other rating actions. Sovereign and related public-sector entities accounted for 11 outlook changes--more than half the ESG-related actions in September (seven for sovereigns and 14 for international public finance). Highlighting the continued weight of governance factors, our action on Spain was driven by the huge COVID-19-induced pressures on its economy, and external and public finances, similar to what many peers are experiencing, but also by unique considerations related to the country's policy effectiveness (see case study below). EU sovereign ratings otherwise have continued to hold up relatively well since the beginning of the pandemic, benefitting from our expectation of strong financial support from the EU's €750 billion Recovery Fund, among other factors. Belarus' disputed presidential election in August weighed on the rating; it now carries a negative outlook, illustrating transparency and other governance factors at play.

The effects of the pandemic continue to be felt across the rating spectrum. Some highly rated entities have experienced pressures, with the German state of Saxony and the Swedish municipality of Taby (both rated 'AAA') assigned negative outlooks. At the other end of the rating scale, the Republic of Congo (Brazzaville) fell into the 'CCC' category, where it joined Zambia, also lowered further.

U.S. Public Finance

Health and safety risks continued to dominate USPF ESG-driven rating actions in September

Table 3

U.S. Public Finance ESG-Related Rating Actions
September Apr-Sept % of total ratings affected
Downgrade 32 116
CreditWatch negative 2 95
Outlook revision 4 486
Total ESG-related rating actions 38 697 4
o/w State & local governments 7 281 2
o/w Higher Education 6 183 30
o/w Health Care 0 51 11
o/w Utilities 0 30 2
o/w Housing 0 25 7
o/w Charter Schools 0 16 4
o/w Transportation* 25 111 45
*Excludes 187 negative outlook revisions on March 26 on almost all public transportation infrastructure issuers. ESG--Environmental, social, and governance.

USPF ESG-driven rating actions included six downgrades of privatized student housing projects and 24 downgrades to airports or airport-related entities in September. Since the start of the pandemic, we have affirmed the ratings on only five airports: Denver International, Chicago O'Hare International, Austin-Bergstrom International, Ontario International in California, and Memphis International Airport. Prior to the pandemic, these five had credit characteristics that set them apart from other airports. Although we affirmed the ratings, all five remain on negative outlook given the financial uncertainty the U.S. airport sector is facing. We believe the entire aviation industry could undergo dramatic reshaping with the rise of virtual meetings and decline of business travel, and, most notably, the industrywide transformation required to address consumer health and safety issues globally. This could lead to sluggish air travel demand that could extend for some years, even after a treatment or vaccine becomes widely available (see "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," published Nov. 12, 2020).

Some USPF issuers are facing simultaneous health and safety emergencies while struggling with the financial, economic, and public health outcomes of the pandemic. The death of George Floyd in May 2020 set off demonstrations throughout the U.S. leading to civil unrest in the likes of New York City, but also in communities such as Kenosha, Wisconsin. The widespread public discourse around ending systemic racism through policy and budget initiatives led us to revise our outlook on Minneapolis (rated 'AAA') to negative from stable. Although the rating action on Minneapolis was also captured as a health and safety social risk, it was driven by the city's role as the epicenter of protests calling for a fundamental reassessment of the role of police in U.S. cities and galvanizing the dismantling of the police department.

Corporates And Infrastructure

COVID-19 continues to dominate ESG-driven actions, but environmental factors have also had negative and positive effects

Table 4

Corporates And Infrastructure ESG-Related Rating Actions
September Apr-Sept % of total ratings affected
Downgrade 21 302
CreditWatch negative 0 44
Outlook revision 15 182
Total ESG-related rating actions 41 556 15
o/w Transportation 6 84 40
o/w Hotels and gaming 8 72 58
o/w Automotive 7 57 71
o/w Media and Entertainment 1 67 39
o/w Retailing 7 53 38
Data is as of Sept. 30, 2020. Source: S&P Global Ratings. ESG--Environmental, social, and governance.

Social distancing and business shutdowns amid the pandemic continued to drive rating actions during September. The 41 actions were comparable to previous months, but well down on the April-June spike in rating activity. Over 70% of September actions remain concentrated in five sectors: media, entertainment, and leisure; hotels and gaming; retail; transportation; and automotive. See our "COVID-19 Heat Map: Updated Sector Views Show Diverging Recoveries," published Sept. 29, 2020, for our analysis of these sectors' high sensitivity to long-term pandemic-induced industry disruption.

Notable downgrades in these sectors included:

  • Merlin Entertainment PLC, Town Sports International Holdings Inc., Cineworld Group PLC, and Six Flags Entertainment Corporation.
  • Nordstrom Inc. (fallen angel), whose performance continued to suffer as secular changes accelerated by the pandemic likely caused lasting damage to the company's competitive position.
  • East Japan Railway Co. and car rental company Europcar Mobility Group S.A. The transport-related aerospace sector also saw Howmet Aerospace (fallen angel) downgraded and a further downgrade of Rolls-Royce.

Positively, social factors yielded an upgrade for New Academy Holding Co. LLC. Its sales benefited from increased demand for outdoor equipment and sports equipment as consumers looked for socially distanced entertainment options and hobbies during the pandemic, leading to better refinancing prospects.

Last but not least, environmental credit factors triggered both positive and negative rating actions in September. On the one hand, we revised the outlook on Enviva Partners L.P. to positive from stable reflecting increased demand for biomass fuel, which we consider an environmental benefit as it contributes to the reduction in greenhouse gas emissions (see Box). On the other hand, we downgraded Alliance Resource Partners as the deteriorating coal market has heightened its business and refinancing risks. There were also several negative outlook revisions driven by natural conditions. This affected PG&E Corp., San Diego Gas & Electric Co., and Edison International as the unprecedented scale of wildfire activity throughout California at the beginning of the season could increase the probability that a Californian investor-owned electric utility causes a catastrophic wildfire more regularly than our prior base-case assumed.

Financial Services

Financial services has felt very few direct* ESG effects, even though the pandemic has triggered widespread negative outlook revisions

While banks and insurers have seen very few rating actions or outlook revisions categorized as driven directly by health and safety factors, they have been susceptible to indirect negative effects from the pandemic-led economic crisis, namely rising credit risks and more volatile financial markets. As of Oct. 16, 2020, we had taken actions on 236 banks that were indirectly related to COVID-19 and the oil price shock, with about three-quarters being outlook revisions. For the insurance sector, the total was just under 10% (three-quarters of which outlook revisions).

In recent weeks, insurance standard-setters have consulted the market on how climate risk should be considered in the supervision of insurance companies. Both the European Insurance and Occupational Pensions Authority (EIOPA) and the International Association of Insurance Supervisors (IAIS) published consultation papers in October outlining tools that the national supervisors in their jurisdictions, Europe and the world, respectively, can consider integrating into their supervisory toolkits. These include qualitative questionnaires; quantitative information requests or disclosure requirements; requirements for corporate governance, risk management and internal controls to measure and manage climate risk; and stress and scenario testing of climate risks, to name a few. In addition, earlier this month the U.S. Federal Reserve Board included climate change as a risk in its financial stability report for the first time. Regulators' increased focus should help raise the bar for insurers' awareness, disclosure, and management of climate-related risks. We welcome these initiatives as a step in the right direction, but recognize it is likely to be a slow and uneven process of adoption because there is no globally consistent standard and national supervisors are at different stages of building capabilities to understand and supervise this risk.

*See Appendix for our approach to direct ESG impacts and indirect non-ESG impact of COVID-19.

Structured Finance

ESG-related rating actions in September were concentrated in Aircraft ABS, with 54 downgrades, besides seven CMBS downgrades.

Table 5

Structured Finance ESG-Related Rating Actions
September Apr-Sept % of total ratings affected
Downgrade 69 340
CreditWatch negative 0 369
Outlook revision 0 0
Total ESG-related rating actions 69 709 1
o/w ABS 0 40 1
o/w CMBS 7 448 16
o/w Linked 1 21 0.3
o/w Non-Traditional* 61 200 16
*Nontraditional structured finance asset classes include whole business, aircraft, container, railcar, timeshare, small business, and triple-net lease securitizations. Data is as of Sept. 30, 2020. ESG--Environmental, social, and governance.

ESG-related rating actions in September predominantly related to 54 downgrades of aircraft and aircraft engine asset-backed securities (ABS) transactions, which were initially placed on CreditWatch negative in March (see case study below). As most of the initial CreditWatch placements following the spread of COVID-19 have now been resolved, ESG-related rating actions may decrease. However, while global economic activity rebounded strongly in the third quarter, credit concerns loom for structured finance, given the pandemic's resurgence. While the credit performance of the majority of structured finance assets has recently stabilized or even improved, the balance of risk remains firmly on the downside. A surge in new infections, further lockdowns, and the expiry of payment holidays and job support schemes may weaken asset performance and trigger further rating actions.

Appendix

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," published Nov. 17, 2020; "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date," published Nov. 17, 2020, and "COVID-19 Activity In Global Structured Finance As Of Oct. 16, 2020," published Oct. 22, 2020.

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 have stopped buyers from making large consumer products purchases.

Related Research

ESG in ratings industry-related commentaries

Cross-practice: 

Sovereigns and supranationals: 

International public finance: 

U.S. public finance: 

Corporates and infrastructure: 

Banks: 

Insurance: 

Structured finance: 

ESG in ratings criteria-related commentaries

Cross-practice: 

Sovereigns and local and regional governments: 

U.S. public finance: 

Corporates and infrastructure: 

Banks: 

Insurance: 

Structured finance: 

This report does not constitute a rating action.

Primary Credit Analysts:Karl Nietvelt, Paris + 33 14 420 6751;
karl.nietvelt@spglobal.com
Nicole Delz Lynch, New York + 1 (212) 438 7846;
nicole.lynch@spglobal.com
Patrice Cochelin, Paris + 33144207325;
patrice.cochelin@spglobal.com
Nora G Wittstruck, New York + (212) 438-8589;
nora.wittstruck@spglobal.com
Matthew S Mitchell, CFA, Paris + 44 20 7176 8581;
matthew.mitchell@spglobal.com
Michael Wilkins, London + 44 20 7176 3528;
mike.wilkins@spglobal.com
Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Secondary Contacts:Emmanuel F Volland, Paris + 33 14 420 6696;
emmanuel.volland@spglobal.com
Lawrence A Wilkinson, New York + 1 (212) 438 1882;
lawrence.wilkinson@spglobal.com
Dennis P Sugrue, London + 44 20 7176 7056;
dennis.sugrue@spglobal.com
Peter Kernan, London + 44 20 7176 3618;
peter.kernan@spglobal.com
Michael T Ferguson, CFA, CPA, New York + 1 (212) 438 7670;
michael.ferguson@spglobal.com
Jesus Palacios, Mexico City (52) 55-5081-2872;
jesus.palacios@spglobal.com
Bertrand P Jabouley, CFA, Singapore + 65 6239 6303;
bertrand.jabouley@spglobal.com
Timucin Engin, Dubai + 905306817943;
timucin.engin@spglobal.com

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