Active management has supported credit quality. Across sectors, the pandemic and associated economic and fiscal pressures have been actively managed, and that has supported credit quality, but the magnitude and duration of this crisis will contribute to credit pressure for many.
The health and economic recoveries will continue to be uneven. Different state and local protocols to manage the pandemic and the vaccine rollout continue to influence the economy generally and consumer demand--especially for transportation and higher education—in particular.
Federal policy will influence credit trajectory. A new administration will mean a new policy and funding priorities in key areas, which will influence sectors in different ways. In addition to general fiscal and monetary policy, issues such as stimulus funding, health care initiatives, regulatory changes, and prospects for a funded infrastructure initiative are key things we are watching for 2021.
As we look at the year ahead the key question for U.S. public finance is: will 2021 see the pandemic contained and the economy and credit conditions back on track? We have published our credit outlooks for all key sectors with a focus on answering this important question. In each report, we provide insight on the key credit issues we are watching in the year ahead and answer questions that matter from a credit standpoint. The sectors that comprise the municipal market are diverse but there are some key macro issues that will matter for all in terms of credit performance in the year ahead.
Our sector views in U.S. public finance remain negative with the exception of public power and electric cooperatives, municipal water and sewer utilities, and public finance housing. A sector view is a macro, forward-looking assessment on where we see credit trends in the year ahead; for 2021 there is likely to be more negative than positive rating actions. A sector view does not apply to specific issuer or issue level ratings. We will continue to update our sector views as credit and economic conditions warrant.
As vaccine rollout continues in the U.S., S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization will pave the way for a return to more normal levels of social and economic activity. As the situation evolves, we will update our views accordingly.
Below we provide a more detailed look at key sectors.
In January, we held a series of webcasts where senior analysts from each sector discussed our views and took questions from the participants. To listen to the replays, click here.
Sector view: Negative
Negative now, but potentially back on track at some point in 2021. Although signs of a recovery have begun to take hold with the approval of vaccines and the stabilizing of certain revenues, many headwinds will continue to bear down on state credit stability in 2021. The severity of the sudden-stop recession and the reintroduction of social distancing measures in the winter will have a lasting effect on local economies and thus budget stability. S&P Global Economics expects national real GDP to have contracted 3.9% in 2020 and to grow 4.2% in 2021. Should vaccinations progress smoothly and economic growth match expectations, credit pressures could wane by mid-year. ("Outlook For U.S. States: Symptoms Persist, But A Shot In The Arm Could Lead To Growth," Jan. 5)
Sector view: Negative
Our view of the sector remains negative given the level of pressures brought by COVID-19 and the recession. While we expect most credits will experience only slight, if any, deterioration in 2021 and beyond, in the current environment we still expect downgrades to outpace upgrades. Credits that maintain higher reserves are better positioned to withstand revenue and expenditure pressure, but for most, active management of any shortfalls will still be critical to maintaining credit quality. Local governments that have weaker financial reserves and less flexibility, and don't proactively manage their budgets in 2021, will be most at risk for credit deterioration. ("Outlook For U.S. Local Governments: Revenue Pressures Mount And Choices Get Harder," Jan. 6)
Sector view: Negative
For the fourth consecutive year, we have a negative view of rating stability for U.S. higher education as colleges and universities continue to experience significant COVID-related operating challenges. While many schools were having difficulty meeting enrollment and revenue targets pre-COVID, the pandemic has exacerbated those pressures, and has forced a fundamental shift in business models for all. The effectiveness of vaccination will be critical to in-person class resumption, but challenges facing the industry are not affecting all schools equally. Schools with weaker demand and financial profiles will have less operating flexibility and could face credit deterioration. ("Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables," Jan. 20)
Sector view: Negative
We believe many providers may still experience pandemic-related volume and operating challenges that could yield cash flow and margin compression throughout 2021. These challenges are compounded by industry headwinds which had been growing for several years. These factors, on balance, could continue to stress credit quality as the industry continues to evolve, and strategic investments and capital remain necessary to maintain longer-term enterprise and competitive strength. Effective leadership and balance sheet strength could provide a foundation for a return to stability post-COVID-19. ("Outlook For U.S. Not-For-Profit Acute Health Care: Navigating The Bumps While Getting Back On Track," Jan. 12)
Sector view: Mostly negative
S&P Global Ratings' 2021 view of business conditions and credit quality across U.S. public transportation infrastructure is negative for the airport, mass transit, parking, and toll road sectors, and stable for the ports and federal grant-secured sectors. ("Outlook For U.S. Not-For-Profit Transportation Infrastructure: Light At Tunnel’s End – But How Long Is The Tunnel?," Jan. 13)
Public Power And Electric Cooperative Utilities
Sector view: Stable
We expect most of the sector's ratings to remain stable in 2021. Nearly all the sector's utilities are displaying resilience in the face of the pandemic's disruptions. We expect low prices for natural gas, and cost cutting measures, will continue to temper the financial pressures on the economy and electric sales. Nevertheless, we recognize that financial performance and credit ratings could be pressured, particularly at utilities that rely on electric revenues from customers hardest hit by the pandemic, such as businesses engaged, and residential ratepayers employed, in the hospitality and travel industries, or utilities required to make transfer payments to offset declines in municipal tax revenues. ("Outlook For U.S. Public Power And Electric Cooperative Utilities: Ratings Should Remain Resilient," Jan. 14)
Sector view: Negative
While there are several factors that could influence credit quality over the next year, revenue pressures caused by cuts, delays, or deferrals to per-pupil funding have the most potential to bring on credit deterioration. We do not expect all credits will weaken in 2021 and beyond, but in the current environment we still expect downgrades to outpace upgrades. Any major policy changes negatively affecting school choice could also cause disruption. Schools with relatively stronger enrollment trends and greater financial reserves are likely to fare better, while lower rated schools in challenged states will have less operating flexibility. ("Outlook For Charter Schools: State Revenue Weakness May Test Credit Quality," Jan. 7)
Sector view: Stable
Our view on the sector has shifted to stable based on a demonstrated combination of organizations' credit fundamentals and direct support: the financial strength and resilience of housing issuers, near-term government support helping to stabilize at-risk households' finances and added funding for institutions. While we expect unemployment levels to remain elevated through 2021 and the evolution of the pandemic remains uncertain, we expect most housing entities will experience minimal credit pressures. Certain subsectors may even receive additional support from the new administration. ("Outlook For U.S. Public Finance Housing: Sheltered From The Storm," Jan. 21)
Water And Sewer Utilities
Sector view: Stable
The negative pressures from COVID-19 may take longer to present themselves, if they materialize at all. Many factors that steadied ratings in 2020 might be less of a factor in 2021, depending on both the recovery and additional federal actions; still, just enough positives exist to lend rating stability. ("Outlook For U.S. Water And Sewer Utilities: 2021 Provides 2020 Hindsight," Jan. 19)
This report does not constitute a rating action.
|Primary Credit Analyst:||Robin L Prunty, New York + 1 (212) 438 2081;|
|Secondary Contacts:||David N Bodek, New York + 1 (212) 438 7969;|
|Geoffrey E Buswick, Boston + 1 (617) 530 8311;|
|Theodore A Chapman, Farmers Branch + 1 (214) 871 1401;|
|Suzie R Desai, Chicago + 1 (312) 233 7046;|
|Kurt E Forsgren, Boston + 1 (617) 530 8308;|
|Jane H Ridley, Centennial + 1 (303) 721 4487;|
|Jessica L Wood, Chicago + 1 (312) 233 7004;|
|Marian Zucker, New York + 1 (212) 438 2150;|
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