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Credit Trends: 'BBB' Pulse: Rising Stars Hit Highest Monthly Total Since Before The Pandemic

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Credit Trends: 'BBB' Pulse: Rising Stars Hit Highest Monthly Total Since Before The Pandemic

Rising Stars Accelerated In April

In April, five issuers became rising stars (issuers upgraded to investment grade from speculative grade)--the highest monthly total since before the COVID-19 pandemic. This continues the trend of improving credit quality that we're seeing for many investment-grade, and near-investment-grade, issuers that we highlighted in our last report, "'BBB' Pulse: After A Turbulent Year, Rising Stars Once Again Outnumber Fallen Angels." Year to date (through April), rising stars outnumber fallen angels (issuers downgraded to speculative grade from investment grade) 14 to seven.

The ratio of rising stars to speculative-grade issuers (rated 'BB+' and lower) has steadily risen since the end of 2020, when it fell to an all-time low of 0.2%. While the ratio climbed to 0.6% at the end of April, it remains far below the trailing-10-year average of 1.1%.

Chart 1

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Of the five new rising stars, four were previously potential rising stars (issuers rated 'BB+' with positive outlooks or ratings on CreditWatch with positive implications).

The first three are real estate firms that benefited from strong profitability, increased cash, and decreased debt--PulteGroup Inc., Shimao Group Holdings Ltd., and MDC Holdings Inc. Russian shipping firm Sovcomflot PAO was upgraded because of increased financial flexibility, after paying down debt with its IPO proceeds and diversification of its business lines. The remaining rising star was semiconductor producer Qorvo Inc., which posted strong growth for two quarters and will likely see continued strong demand from 5G smartphone makers.

The Number Of Potential Rising Stars Continues To Increase

Six issuers were added to the list of potential rising stars in April, which was the largest number of additions since the pandemic began and brought the total count to 16. Moreover, four out of the 16 are on CreditWatch positive, which typically has a shorter resolution time than a positive outlook (typically within 90 days for a CreditWatch, compared with up to two years for an outlook, see "Guide To Credit Rating Essentials, What Are They And How Do They Work?").

Chart 2

image

Mergers and acquisitions (M&A) continue to lift some issuers' credit quality, particularly when they involve being acquired by a higher-rated entity, or when they involve credit-positive synergies or diversification of businesses. Two of the issuers added to the potential rising stars list in April came after announcing M&A plans. The ratings on Cadence Bancorporation were put on CreditWatch positive after announcing its planned merger with 'BBB' rated BancorpSouth Bank. The rating outlook on New York Community Bancorp was revised to positive after its agreement to acquire Flatstar Bancorp, which could improve revenue diversification, deposit funding, and interest rate risk. Nonetheless, we continue to highlight that M&A activity could be a double-edged sword for credit quality and could be a negative for credit quality in cases where there are looser financial policies.

Two issuers that were fallen angels in 2020 have subsequently become potential rising stars-- Minsur S.A. (downgraded to speculative grade in September 2020) and Zijin Mining Group (downgraded to speculative grade in July 2020). Both are in the metals and mining sector, where higher commodity prices combined with increases in production capacity resulted in positive outlook revisions.

The remaining two additions to the potential rising stars list were petrochemical company Alpek S.A.B. de C.V., which is seeing strong operating and financial performance related to higher prices, and Dell Technologies Inc., whose spinoff of its VMWare subsidiary would result in proceeds that would likely be used for debt repayment.

As Rising Stars Gain Momentum, Fallen Angels Continue To Decrease

There were three new fallen angels in April, and the rating actions on two entities are related. All three issuers were also previously potential fallen angels (issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications).

The long-term local and foreign currency sovereign credit ratings on Kingdom of Morocco were lowered to 'BB+' following the country's sharp GDP contraction in 2020 that exacerbated the contingent liability risks from rising state guarantees, and led to a deteriorating budget position. OCP S.A., a government-related phosphate producer in Morocco, was subsequently downgraded because we cap our rating on this issuer at the sovereign rating level since we consider OCP a government-related entity.

G4S PLC was downgraded after being acquired by Allied Universal Topco LLC (which was itself upgraded to 'B' from 'B-' after the transaction).

Chart 3

image

With few new fallen angels in April, the ratio of fallen angels to investment-grade issuers declined further, to 1.6%, a full percentage point below its mid-2020 peak. This ratio remains lower than its 10-year average of 1.9%.

Meanwhile, the additional cost of funding for a speculative-grade issuer (above the cost of investment grade) has steadied over the past month after declining sharply the past 12 months. The difference between 'BB+' and 'BBB-' option-adjusted spreads has hovered around 90 basis points (bps) over the past month, and while this is much lower than the 244 bps peak in mid-2020, it is still nearly 10 bps above the 10-year average.

Chart 4

image

The Number Of Potential Fallen Angels Continues To Decline

In March, the count of potential fallen angels recorded a net decrease of 11--the largest drop since the pandemic began. In April, we saw further declines, with a net decrease of 10 issuers to 74. These included 11 removals and only one addition. This marked the ninth consecutive month with net decreases in the number of potential fallen angels (see chart 5).

Chart 5

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The number of potential fallen angels with ratings on CreditWatch with negative implications remained unchanged at three in April. The majority of potential fallen angels face less immediate downgrade risk, since the estimated timeframe of a potential downgrade is typically within 90 days for a negative CreditWatch, compared with up to two years for a negative outlook on an investment-grade rating (see "Guide To Credit Rating Essentials, What Are They And How Do They Work?").

The single addition to the list of potential fallen angels was Chinese e-commerce company Meituan, whose investments into the new business of community group buying could result in deficits for free operating cash flow and EBITDA for two years.

Of the 11 issuers that were removed from the list of potential fallen angels, seven had rating outlooks that were revised to stable or positive.

  • Darden Restaurants Inc. was revised to a positive outlook as the casual dining segment faces better operating conditions because of a faster U.S. economic recovery.
  • Aviation Capital Group LLC, Retail Opportunity Investments Corp., and SKYCITY Entertainment Group Ltd. had outlooks revised to stable on the back of better-than-expected performances during the pandemic and beyond.
  • The outlooks on Celulosa Arauco y Constitucion S.A. and Inter Pipeline Ltd. were revised to stable. Paper products producer Arauco has been seeing higher pulp prices that would assist in deleveraging. Oil and gas transport firm Inter Pipeline announced an update on its production capacity contracting that was consistent with S&P Global Ratings' assessment of its business risk profile.
  • The outlook on the sovereign rating on Romania was revised to stable to recognize fiscal consolidation by the new government.

Three other removals were due to downgrades to speculative grade--G4S PLC, Morocco, and OCP S.A. The remaining removal was Yuexiu Real Estate Investment Trust, which no longer had outstanding rated debt by the end of April.

The sector concentration of potential fallen angels has remained largely the same since March. Financial institutions lead the list with 14 (but the proportion of potential fallen angels as a share of the investment-grade population for financial institutions is low because of the high number of rated entities in that asset class). Media and entertainment, including lodging and leisure, leads nonfinancials with 12. Consumer products and utilities have six each and have overtaken real estate as the nonfinancial sectors with the second-most potential fallen angels.

Chart 6

image

Table 1

Three New Fallen Angels In April
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
22-Apr-21

G4S PLC

B BBB- Consumer products U.K. 1,867
16-Apr-21

OCP S.A.

BB+ BBB- Chemicals, packaging, and environmental services Morocco 2,850
2-Apr-21

Kingdom of Morocco

BB+ BBB- Sovereign Morocco 8,773
25-Mar-21

Empresa Nacional del Petroleo

BB+ BBB- Utilities Chile 2,480
16-Mar-21

Host Hotels & Resorts Inc.

BB+ BBB- Media and entertainment U.S. 4,750
17-Feb-21

TechnipFMC Plc

BB+ BBB+ Oil and gas U.K. 2,572
5-Feb-21

Hexcel Corp.

BB+ BBB- Aerospace and defense U.S. 700
Note: Fallen angels are defined as investment-grade issuers currently with bonds outstanding that have been downgraded to speculative grade (i.e., from 'BBB-' or above to 'BB+' or below). Includes all rated issuers with valid outstanding debt at the time of the rating action. Valid debt includes issuer-level debt (both secured and unsecured), bank loans, subordinated debt, medium-term notes (MTN), preferred stock, convertible debt, and drawdowns under MTN programs and excludes commercial paper programs, shelf registrations, certificates of deposit, and debt rated on a confidential basis. Data as of April 30, 2021. Source: S&P Global Ratings Research.

Table 2

Potential Fallen Angels Count Drops Further To 74; CreditWatch Negative Placements Stayed At Three
'BBB-' rated issuers with negative outlooks or on CreditWatch with negative implications
Subsector Issuer CreditWatch negative/negative outlook New to the list this month Country Debt amount (mil. US$)
Financial institutions

AIB Group PLC

Negative Ireland 7,343
Utilities

Abertis Infraestructuras S.A.

Negative Spain 21,385
Media and entertainment

Amadeus IT Group S.A.

Negative Spain 5,441
Financial institutions

Argo Group International Holdings Ltd.

Negative U.S. 275
High technology

Avnet Inc.

Negative U.S. 1,200
Transportation

Avolon Holdings Ltd.

Negative Cayman Islands 9,674
Financial institutions

Bank of Ireland Group PLC

Negative Ireland 7,878
Chemicals, packaging, and environmental services

Beijing Haidian State-Owned Asset Investment Group Co. Ltd.

Negative China 500
Telecommunications

Bharti Airtel Ltd.

Negative India 5,662
Aerospace and defense

Boeing Co.

Negative U.S. 60,073
Homebuilders/real estate companies

Brookfield Property REIT Inc.

Negative U.S. 13,700
Telecommunications

CAS Holding No.1 Ltd.

Negative British Virgin Islands 3,542
Metals, mining, and steel

Cameco Corp.

Negative Canada 808
Retail/restaurants

Capri Holdings Ltd.

Negative British Virgin Islands 450
Metals, mining, and steel

Carpenter Technology Corp.

Negative U.S. 600
Homebuilders/real estate companies

China Jinmao Holdings Group Ltd.

Negative Hong Kong 1,050
Media and entertainment

Choice Hotels International Inc.

Negative U.S. 1,250
Homebuilders/real estate companies

Citycon Oyj

Negative Finland 2,782
Forest products and building materials

Eagle Materials Inc.

Watch Neg U.S. 350
Oil and gas

Ecopetrol S.A.

Negative Colombia 9,850
Utilities

Eesti Energia AS

Negative Estonia 605
Merchant Power

Enable Midstream Partners LP

Negative U.S. 1,850
Midstream

Energy Transfer LP

Negative U.S. 46,302
Media and entertainment

Expedia Group Inc.

Negative U.S. 8,936
Financial institutions

FCE Bank PLC

Negative U.K. 6,762
Financial institutions

Financiera de Desarrollo Territorial S.A. FINDETER

Negative Colombia 500
Transportation

FirstGroup PLC

Negative U.K. 730
Capital goods

Flowserve Corp.

Negative U.S. 1,905
Capital goods

Fluor Corp.

Negative U.S. 1,705
Media and entertainment

Genting New York LLC

Negative U.S. 525
Financial institutions

Golub Capital BDC, Inc

Negative U.S. 800
Diversified

Grupo de Inversiones Suramericana S.A.

Negative Colombia 850
Media and entertainment

Hyatt Hotels Corp.

Negative U.S. 2,950
Financial institutions

ICICI Bank Ltd.

Negative India 2,150
Consumer products

ISS A/S

Negative Denmark 2,539
Media and entertainment

ITV PLC

Negative U.K. 2,056
Homebuilders/real estate companies

Immofinanz AG

Negative Austria 1,209
Utilities

Indigo Group S.A.

Negative France 2,388
Media and entertainment

Informa PLC

Negative U.K. 2,863
Media and entertainment

InterContinental Hotels Group PLC

Negative U.K. 2,909
Financial institutions

Intercorp Financial Services Inc.

Negative Peru 600
Media and entertainment

JCDecaux S.A.

Negative France 2,358
Media and entertainment

Las Vegas Sands Corp.

Negative U.S. 10,300
Utilities

Madrilena Red de Gas, S.A.U.

Negative Spain 1,149
Financial institutions

Marex Spectron Group Ltd.

Negative U.K. 6
Media and entertainment

Marriott International Inc.

Negative U.S. 10,387
Consumer products

Meituan

Negative Yes Cayman Islands 2,000
Retail/restaurants

Metro AG

Negative Germany 2,025
Capital goods

Metso Outotec Oyj

Negative Finland 846
Consumer products

Molson Coors Beverage Co.

Negative U.S. 7,367
Automotive

Nexteer Automotive Group Ltd.

Negative Cayman Islands 250
Automotive

Nissan Motor Co. Ltd.

Negative Japan 17,418
Financial institutions

Nova Ljubljanska Banka D.D.

Negative Slovenia 290
Utilities

PT Pelabuhan Indonesia III (Persero)

Negative Indonesia 500
Consumer products

PVH Corp.

Negative U.S. 3,558
Health care

Perrigo Co. plc

Negative Ireland 1,200
Financial institutions

Prospect Capital Corp.

Negative U.S. 7,535
Utilities

Puget Energy Inc.

Negative U.S. 6,278
High technology

Rakuten Group Inc.

Watch Neg Japan 3,759
Sovereign

Republic of Colombia

Negative Colombia 32,176
Media and entertainment

Resorts World Las Vegas LLC

Negative U.S. 1,750
Oil and gas

SK Innovation Co. Ltd.

Negative Korea 500
Homebuilders/real estate companies

SL Green Realty Corp.

Negative U.S. 10,750
Transportation

Stagecoach Group PLC

Negative U.K. 556
Forest products and building materials

Standard Industries Inc.

Watch Neg U.S. 5,017
Consumer products

Steelcase Inc.

Negative U.S. 450
Consumer products

Suedzucker AG

Negative Germany 1,814
Financial institutions

Synovus Financial Corp.

Negative U.S. 1,880
Financial institutions

Tanner Servicios Financieros S.A.

Negative Chile 356
Chemicals, packaging, and environmental services

UPL Corp. Ltd.

Negative Mauritius 1,200
Financial institutions

Virgin Money UK PLC

Negative U.K. 5,061
Capital goods

Westinghouse Air Brake Technologies Corp.

Negative U.S. 3,500
Automotive

Zhejiang Geely Holding Group Co. Ltd.

Negative China 3,897
Transportation

easyJet PLC

Negative U.K. 3,265
Note: Potential fallen angels are defined as issuers rated ‘BBB-‘ by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications, and which currently have bonds outstanding. Includes all rated issuers with valid outstanding debt at the time of the rating action. Valid debt includes issuer-level debt (both secured and unsecured), bank loans, subordinated debt, medium term notes (MTN), preferred stock, convertible debt, and drawdowns under MTN programs and excludes commercial paper programs, shelf registrations, certificates of deposit, and debt rated on a confidential basis. Data as of April 30, 2021. Source: S&P Global Ratings Research.

Table 3

Five Rising Stars In April 2021
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
7-Jan-21

WPX Energy Inc.

BBB- BB- Oil and gas U.S. 4,750
8-Jan-21 Fiat Chrysler Automobiles N.V. BBB- BB+ Automotive Netherlands 25,561
13-Jan-21

Parsley Energy LLC

BBB BB Oil and gas U.S. 4,750
1-Feb-21

Norbord Inc.

BBB- BB Forest products and building materials Canada 665
23-Feb-21

Advanced Micro Devices Inc.

BBB- BB+ High technology U.S. 1,305
24-Feb-21

Smurfit Kappa Group PLC

BBB- BB+ Forest products and building materials Ireland 2,125
18-Mar-21

QEP Resources Inc.

BBB- B Oil and gas U.S. 1,600
18-Mar-21

Grupo Cementos de Chihuahua S.A.B. de C.V.

BBB- BB+ Forest products and building materials Mexico 260
30-Mar-21

Triton International Ltd.

BBB- BB+ Transportation Bermuda 6,098
5-Apr-21

PulteGroup Inc.

BBB- BB+ Homebuilders/real estate companies U.S. 2,097
8-Apr-21

Shimao Group Holdings Ltd.

BBB- BB+ Homebuilders/real estate companies Cayman Islands 2,100
9-Apr-21

MDC Holdings Inc.

BBB- BB+ Homebuilders/real estate companies U.S. 900
12-Apr-21

Sovcomflot PAO

BBB- BB+ Transportation Russia 750
22-Apr-21

Qorvo Inc.

BBB- BB+ High technology U.S. 1,550
Note: Rising stars are defined as speculative-grade issuers currently with bonds outstanding that have been upgraded to investment grade (i.e., from 'BB+' and below to 'BBB-' and above). Includes all rated issuers with valid outstanding debt at the time of the rating action. Valid debt includes issuer-level debt (both secured and unsecured), bank loans, subordinated debt, medium-term notes (MTN), preferred stock, convertible debt, and drawdowns under MTN programs and excludes commercial paper programs, shelf registrations, certificates of deposit, and debt rated on a confidential basis. Data as of April 30, 2021. Source: S&P Global Ratings Research.

Table 4

Potential Rising Stars Up To 16; Four On CreditWatch Positive
Subsector Issuer Outlook/CreditWatch change New to the list this month Country Debt amount (mil. US$)
Chemicals, packaging and environmental services

Alpek S.A.B. de C.V.

Positive Yes Mexico 2,050
Financial institutions

Cadence Bancorporation

Watch Pos Yes U.S. 85
Financial institutions

CIT Group Inc.

Watch Pos U.S. 5,151
High technology

Dell Technologies Inc

Watch Pos Yes U.S. 108,436
Financial institutions

FleetCor Technologies Inc.

Positive U.S. 4,190
Metals, mining and steel

Gold Fields Ltd.

Positive South Africa 1,000
Utilities

Hrvatska Elektroprivreda d.d.

Positive Croatia 550
Consumer products

JDE Peet's N.V.

Positive Netherlands 5,887
Homebuilders/real estate co.

Lennar Corp.

Positive U.S. 5,000
Insurance

Magellan Health Inc.

Watch Pos U.S. 400
Metals, mining and steel

Minsur S.A.

Positive Yes Peru 450
Media and entertainment

Netflix Inc

Positive U.S. 15,652
Financial institutions

New York Community Bancorp Inc.

Positive Yes U.S. 1,040
Automotive

Volvo Car AB

Positive Sweden 3,197
Metals, mining and steel

Yamana Gold Inc.

Positive Canada 1,800
Metals, mining and steel

Zijin Mining Group Co. Ltd.

Positive Yes China 350
Note: Potential rising stars are defined as issuers rated ‘BB+‘ by S&P Global Ratings with positive outlooks or ratings on CreditWatch with positive implications, and which currently have bonds outstanding. Includes all rated issuers with valid outstanding debt at the time of the rating action. Valid debt includes issuer-level debt (both secured and unsecured), bank loans, subordinated debt, medium term notes (MTN), preferred stock, convertible debt, and drawdowns under MTN programs and excludes commercial paper programs, shelf registrations, certificates of deposit, and debt rated on a confidential basis. Data as of April 30, 2021. Source: S&P Global Ratings Research.

Related Research

This report does not constitute a rating action.

Credit Markets Research:Sudeep K Kesh, New York + 1 (212) 438 7982;
sudeep.kesh@spglobal.com
Vincent R Conti, Singapore + 65 6216 1188;
vincent.conti@spglobal.com
Ratings Performance Analytics:Evan M Gunter, New York + 1 (212) 438 6412;
evan.gunter@spglobal.com
Research Contributors:Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Shripati Pranshu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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