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COVID-19 Heat Map: Pent-Up Demand And Supply Shortages Further Improve Recovery Prospects For Credit Quality

In this article, we share our updated regional estimates of when credit metrics might reach a run-rate recovery back to 2019 levels, which we initially published in June 2020 and updated in September 2020 and February 2021. Rates of recovery continue to vary sharply by region and industry, shaped by a variety of factors:

Vaccination progress is still a critical indicator of progress toward normal economic activity.   Progress has been rapid in North America and Europe but limited in many other regions. India experienced a peak in COVID-19 cases in May 2021, and cases are rising across Latin America. This is in contrast to the U.S. and U.K., where infection levels are at their lowest point in more than a year. In many Asia-Pacific countries, containment measures have been highly successful, but vaccination rates are low, necessitating continued quarantine measures and travel limits.

Robust economic growth from some of the largest economies, namely the U.S. and China, is supporting the broader global economy.   Pent-up demand, fueled by consumer savings and optimism, is buoying spending, and we have revised our expectations for several retail and consumer segments in most regions.

Debt capital markets remain largely accommodative, buoyed by fiscal and monetary stimulus.   This has helped underpin credit quality, albeit at a lower absolute level. While upgrade activity has picked up in 2021, the upgrade volume is dwarfed by downgrades from spring 2020, indicating what could be a longer-term or even permanent shift to lower credit quality. Year-to-date, through May 21, 2021, we have taken negative rating actions on 314 issuers and positive rating actions on 866 issuers. Outlook revisions to stable from negative have made up the largest percentage of the positive rating actions. Most of these were issuers with ratings we raised after having lowered them at least once in 2020.

Supply shortages and price pressures have emerged as an important theme.   Low interest rates have proved supportive to housing markets and residential construction. Homes and building materials are in high demand, with supply shortages contributing to higher prices and improved expectations for these sectors. Metals and mining companies are also benefiting from demand that is outstripping supply as production levels remain well below pre-pandemic volumes. Steel and lumber shortages have caused sharp price increases that have been passed on to builders and consumers with few alternative options. Many of these sectors have been able to pass on increasing prices to consumers, causing us to revise our expectations for 2021 and, in some cases, for the expected timeframe for credit metrics to return to pre-pandemic levels, on average. Several other industries that are exposed to higher input costs, such as consumer products and some capital goods manufacturers, have been less successful in passing on the incremental expenses and could see margins compressed.

Merger and acquisition (M&A) volumes and shareholder returns will likely reach or exceed pre-pandemic levels this year, driven by plentiful and cheap liquidity.   There is an undercurrent of speculative excess in the market, and to the extent that this drives up M&A valuations and leverage, a recovery of credit quality could be prolonged or even elusive. With the massive amounts of borrowing throughout the pandemic, a delay in recovery could be most problematic for the lowest-rated credits. Access to the debt capital markets continues to provide an extended lifeline to issuers and support credit quality in the near term as economic conditions and overall business performance improve. Nearly 25% of nonfinancial corporations are rated 'B-' or lower, and these entities could face ongoing risk of insufficient liquidity or insolvency.

Beyond the pandemic, shifts in consumer and corporate behavior triggered or accelerated by the pandemic will have a sustained impact.   Risks emerging from shifts in corporate, consumer, and government spending could take longer to fully understand, but they will factor into the recovery picture. We have highlighted the risks sectors face of longer-term changes in consumption patterns or accelerated secular change in the regional heat maps below.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Regional Heat Maps

For each region, we have assessed the following based on the rated universe of credits compared to 2019:

  • 2020 assessment of average effect on revenue and EBITDA for the rated universe in the region. Incremental borrowings are a directional estimate of additional debt the sector carried into 2021.
  • 2021 and 2022 estimates of revenue and EBITDA shortfalls relative to 2019. For sectors where we expect revenue and/or EBITDA to be at or better than 2019 levels, we use the descriptor "=>2019."
  • Longer-term industry disruption/acceleration of pre-existing shifts. We have noted where sectors are 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.

Asia-Pacific (APAC)

We still expect most sectors in APAC to recover to their pre-pandemic levels in the second half of 2022, in line with the recovery expectations we published at the beginning of the year. The resurgence of COVID-19 cases in several countries in the region (India, Thailand, Singapore, Korea, Japan, Vietnam, Malaysia, and the Philippines) has not materially affected, so far, the slow corporate recovery that had been building up in some sectors regionally. In most countries, either the lockdowns are localized or companies have started putting measures in place to limit production stoppage or develop new sales channels for their products.

Regionally, average revenues, profit levels, and credit ratios have already recovered to, or close to, pre-pandemic levels for the essential retail, consumer staples, telecommunications, and utilities sectors across most Asian countries. These sectors were generally resilient in 2020, or demand growth has gradually picked up steam in fourth-quarter 2020 and since the beginning of the year in sectors such as utilities.

We still expect a protracted recovery toward late 2022 or 2023 for cyclical transportation sectors (especially airlines), tourism-led sectors such as lodging and gaming, auto, and oil and gas, given the sharp revenue and profit contraction that took place in 2020. The late recovery of the oil and gas sector follows our price deck assumption, which is still below the pre-pandemic levels despite an upward revision at the beginning of the year. Airports are likely to recover only beyond 2023 because restrictions on cross-border travel and border controls will likely remain in place until there is a comprehensive global vaccine rollout.

Revenue and profit momentum have picked up steam in the discretionary retail, homebuilders, and hardware/semiconductor sectors in APAC. As a result, we now anticipate those revenues, profits, and credit ratios will recover about six months earlier than we had anticipated at the beginning of the year.

Nonessential retail:   Consumer incomes across APAC have held relatively steady throughout the pandemic, largely because of sizable government stimulus measures, which elevated savings levels as consumers stayed at home. There is growing evidence that this latent consumption translates into more pronounced demand for discretionary products and a swift recovery of revenues, profits, and credit ratios when health conditions improve and COVID-19 cases become under control such as in Pacific countries and in China. Wide variations in the pace of recovery still exist throughout the region--in Southeast Asian countries where health conditions haven't stabilized yet (most notably Indonesia, Philippines, and Malaysia), the recovery of profit and credit ratios in nonessential retail is likely to be more protracted, with a recovery more likely in 2023.

Technology hardware and semiconductors:   Accelerating investments in 5G mobile communications and continued COVID-19 mitigation have supported demand, setting up a faster-than-expected recovery for 2021, compared with our earlier expectation of 2022. In the first quarter of 2021, major tech hardware companies reported strong operating performance that exceeded the pre-pandemic level. The earnings recovery we've observed so far in 2021 bodes well for the likely full-year 2021 operating performance and credit ratios, even though capacity constraints and component shortages will limit further upside in the second half of 2021.

Homebuilders:   Marketing sales performance in 2020 and so far in 2021 has been more solid that we had anticipated for the main countries in the region. Debt growth has also remained limited, especially in China given the tighter leverage policy implemented by authorities. This has helped consolidate credit ratios, which are likely to recover to pre-pandemic levels in the second half of 2021. Like for discretionary retail, country differences within APAC remain prevalent in the homebuilder sector. Marketing sales have also accelerated in Southeast Asia, but the high legacy debt and immaterial or negative discretionary cash flow mean a return to pre-pandemic levels is unlikely before 2022, or 2023 for homebuilders in Indonesia.

While we observe the recovery gaining traction in a growing number of sectors throughout APAC, downside rating risk persists regionally heading into the second half of 2021. As a region, the percentage of nonfinancial issuers with further downside potential over the next 12-24 months is still about twice as high as it was in 2019. A little more than 20% of our ratings on investment-grade issuers, and almost 33% of our ratings on speculative-grade issuers still had a negative outlook or were on CreditWatch with negative implications as of May 31, 2021.

The recovery path of the corporate sector among countries within the region also differs significantly, with issuers in the same sectors but in different countries recovering at different speeds. Operating conditions have improved faster than we had anticipated in China, with a smaller downside risk to ratings heading into the second half of 2021. About 20% of issuer ratings are on negative outlook in China. Corporate Indonesia is at the other end of the spectrum, with a still high (albeit slightly reduced) 45% of ratings on negative outlook. Downside rating pressure remains close to multiyear highs in Japan and the Pacific.

Beyond a recovery in revenues and profits, a recovery in credit markets and more widespread availability of funding will be necessary to stabilize credit quality. Nearly half of speculative-grade corporate ratings in APAC have a negative outlook because of weakening liquidity or reduced access to funding amid growing refinancing requirements. Capital providers, including domestic banks, have been increasingly selective in extending long-term and working capital financing. We see that situation persisting through 2021. Improving operating conditions may therefore not be sufficient to stabilize credit quality.



Europe, Middle East, Africa (EMEA)

Life in Europe is slowly returning to normal, thanks to the effects of vaccine campaigns in most European countries. If vaccinations continue at the current pace and there aren't spikes in contagions due to new variants, in line with our estimations, about 70% of the EU adult population would be vaccinated by late July to early August 2021. Under this assumption, between the second and third quarters, local limitations to movements and social activities could completely disappear. This will help the recovery of sectors directly hit by the limitations to mobility such as lodging and hospitality, nonessential retailers, and restaurants. We assume they will fully recover revenues and EBITDA to 2019 levels in 2023. For restaurants, our EBITDA recovery prospects in 2021 have slightly improved compared to February 2021, since which we have revised several outlooks to stable. For lodging and hospitality, the third quarter is high season for vacations in Europe, and reservations are still lower than normal years, but we see the possibility of positive developments as the effects of vaccines take hold. We assume that part of the international demand will be substituted by more domestic travel. Rules on the movement among European countries are still unclear, and the adoption of common rules could significantly help the sector. The stimulus packages granted by the EU and U.K. governments help in this respect, because they support consumer confidence and spending. In line with the improving trend, since our last publication in February, the net negative rating bias has been reducing, and we have returned several rating outlooks to stable.

Consumer products (luxury and discretionary):   Sectors exposed to extra-European demand, in particular to China and the U.S., are on average recovering faster than others. Luxury goods is the best example: In 2020, the fall in revenues and EBITDA from 2019 levels was 15%-25% and 25%-40%, respectively. We had assumed the sector would not recover to 2019 levels until 2023 or later. However, there is evidence that since year-end 2020, demand from China rebounded with very visible effects on jewelry, fashion, and leather goods. On the basis of increased demand from China and the U.S. this year, we have revised our expectation of recovery to 2019 levels to 2022 from the previous indication of 2023.

Metals and mining:   The metals sector is also performing better than we had expected at global level. The sharp increase in demand for metals is supported by strong demand coming from China, the effects of the global recovery that is also supported by governments' investments in infrastructure, and by some imbalances between supply and demand. A structural increase in demand of some metals--for example, copper, cobalt, and lithium--is linked to the environmental transition occurring in several industries. Now, we expect that the sector will recover to 2019 levels of revenues and EBITDA this year.

Airports, airlines, and commercial aerospace:   We expect these sectors to recover after all the others, beyond 2023. The decrease in contagions achieved by the vaccination campaigns supports the recovery of local traffic, but the restart of the international global movements is still uncertain because of the uneven pace of the global vaccination campaign. In Europe, air traffic is affected by rules that reflect some differences in the vaccination campaigns. If these are softened, mobility in Europe could benefit during the summer season. For airlines and airports, we continue to expect air traffic to recover to pre-pandemic levels by 2024. Domestic and short-haul leisure travel will drive the rebound initially, with business and international routes (which tend to be more profitable) recovering more slowly. Some of the weakness may persist to the extent that videoconferencing claims a larger share of business meetings, as companies scrutinize their cost bases post-pandemic.



Latin America

In Latin America, various sectors have been performing better than we originally expected at the outbreak of the pandemic a year ago. Going forward for the next 12-18, we're cautiously optimistic about the recovery path for most industries, considering that the gradual improvement in global economic activity would help restore business fundamentals to pre-pandemic conditions.

For the remainder of this year and possibly part of 2022, key markets such as Brazil, Mexico, Colombia, and Peru will cope with the risk of facing renewed bouts of COVID-19 cases because of social-distancing fatigue, relaxed containment safeguards, and a slow vaccine rollout, which is preventing widespread immunity.

Last year, we estimated that the bulk of our corporate ratings portfolio in the region would face a top-line contraction during 2020 that would trigger a deterioration in key credit metrics. We also indicated that less than half of the sectors that we cover would bring their credit metrics to 2019 levels by year-end 2021 because weak consumer and business conditions would prevail for several months. Under our updated recovery path assessment, we now believe that in 2021, at least 60% of the sectors we cover in the region will return their credit metrics to pre-pandemic levels, and this figure will increase to 80% of sectors recovering by the end of 2022.

We have identified that demand for essential consumer products and services has posed strong resistance to the region's generalized economic downturn and rising unemployment in 2020. Also, social distancing has changed consumer behavior and has redirected demand toward goods and services that improve the stay-at-home experience, including connectivity, entertainment, and comfort. Commodity-driven industries are outperforming our previous expectations from a year ago because they are benefiting from the sharp increase in commodity prices, including metals, crude oil, and agricultural products.

Our assessment of the highest-risk exposures has not changed much, and we don't see demand for sectors that involve close and direct human interaction returning to pre-pandemic levels until 2023 and beyond. Restaurants, airlines and airports, gaming, and leisure continue to suffer from the abrupt contraction in demand a year ago, and they likely won't recover until immunization programs across the region and around the world restore safety conditions for socializing and mass interactions. In the case of oil and gas refining and marketing, the pace at which volumes return to pre-pandemic levels will largely depend on the trajectory of oil prices. However, slim margins and regional difficulties, such as economic, political, and social risks, could weigh on the sector's recovery path.



North America

COVID-19 case counts have plummeted in recent months to lows not seen in more than a year as vaccination rates exceeded 40% in the U.S. and are underway, albeit at a much earlier stage, in Canada. Consumers are eager to spend, considering the renewed optimism, pent-up demand, and sizable savings balances.

M&A and leveraged buyout issuance totaled $73.1 billion in the first quarter of 2021, a 47% gain from first-quarter 2020 and the highest total since the second quarter of 2018. While M&A could delay a recovery of credit metrics, favorable credit market conditions continue to provide an extended lifeline to issuers and support credit quality in the near term as economic conditions and overall business performance improve. S&P Global Ratings Research expects the U.S. trailing-12-month speculative-grade corporate default rate to decline to 4% by March 2022 from 6.3% as of March 2021.

Against the backdrop of resurgent economic activity, prices have increased in several industries as demand outstrips supply ramping back up from the pandemic-induced standstill. We expect the supply-demand imbalances will correct with near-term transitory inflation swings filtering out of the economy over the course of the year. For sectors such as chemicals, as well as metals and mining, where there is an ability to pass price increases through to consumers, our expectations for 2021 and the timeframe for recovery have improved since our last publication.

We have revised our expectations for the technology hardware /semiconductors, metals and mining, and advertising-supported media sectors, which we now expect will recover to 2019 credit metrics sooner, in the first half of 2021.

Tech hardware/semiconductors:   Hardware sales exceeded our expectations in late 2020 and early 2021 (e.g., PCs, smartphones, gaming, etc.), and our growth expectations for the industry are consistent with global GDP recovery as enterprise and commercial information technology spending comes back. We expect a strong macroeconomic recovery, shortages of critical components, and dwindling inventory to result in tight supply chain conditions into 2022, supporting favorable technology industry conditions even as the sector adds capacity. Customers are buying 5G smartphones at a brisk pace, and this is seeding demand for wireless service. The completion of the C-Band auction in the U.S. in first-quarter 2021 set the stage for increasing network investments in the second half of the year. Tensions between the U.S. and China remain high, and President Joe Biden's administration wants to incentivize more domestic semiconductor production to mitigate geopolitical risk. We expect strong fundamentals for the tech industry to result in a positive bias in rating actions for U.S. tech in 2021.

Metals and mining:   S&P Global Ratings raised its price assumptions for most metals for the second time since September 2020. We believe this will support favorable credit momentum for metals producers, which have benefited from two to three years of financial restraint before prices began to rise sharply in mid-2020. Pandemic- and market-induced production cutbacks, as well as trade friction, have coincided with a surge in demand after a significant period of destocking. For example, spot prices for copper hit their highest level in a decade only a year after dropping to near decade lows. This highlights the metal's fundamentally tight supply-demand balance amid improving economic fundamentals and long-term demand tailwinds stemming for the shift toward greater electrification. Production discipline and trade barriers are causing steel prices to reach all-time highs in the U.S. and Europe. Market conditions in 2021 could yield windfall profits and cash flow, potentially sparking greater shareholder returns, growth capital expenditure, and M&A.

Ad-supported media:   We expect total advertising will recover to surpass 2019 levels this year, with a robust recovery in TV and digital advertising leading the recovery and more than making up for radio and transit advertising, which are lagging.

We updated our U.S. advertising forecast for 2021 and now expect advertising will grow by 8.8%, underpinned by 14% growth in the digital segment. Ad-based media sectors continue to see sequentially improving advertising trends since the second-quarter 2020 trough, though the recovery rate is mixed. TV and billboards are pacing ahead of our expectations, while radio and transit are behind. Credit quality is stabilizing, if not improving, for many U.S. advertisers, and our rating actions reflect this trend. We saw a spate of downgrades and negative outlooks last year, and we're now seeing some positive momentum as advertising trends outpace our previous assumptions.

Chemicals:   We also moved forward our credit metric recovery expectation for the chemicals sector to the second half of 2021 as it is likely to benefit from an increase in demand. Very high domestic GDP, as well as improved global GDP rates, and strong demand from key end markets including housing, auto, packaging, tech, and general industrial are contributing to this positive demand outlook. The demand growth for many chemicals translates to an environment where it is easier-than-usual for chemical companies to pass on to customer the increases in raw material prices we anticipate. Profitability in 2021 should remain in line with 2020 at least, but it could improve in many subsegments. A small number of highly leveraged companies remain dependent on capital markets to meet refinancing needs.

Travel:  We still expect the U.S. travel sector will take years to recover to pre-pandemic credit metrics, but the industry is showing signs of recovery and has potentially reached an inflection point. With the good pace of U.S. vaccinations, massive fiscal stimulus and consumer savings, and pent-up demand for leisure travel, it's plausible the worst is behind us and that upside to our base-case forecast could materialize. That said, companies have incurred significant debt loads during the pandemic, and leverage is at all-time highs, while capital allocation decisions remain uncertain. Accordingly, ratings bias is still overwhelmingly negative, and any slowdown in vaccination rates, weakness in the recovery for group and business travel, or more aggressive financial policy related to M&A, could result in additional downgrades. That said, we could return rating outlooks to stable over the coming quarters if positive trends prove sustainable and financial policy remains supportive.



Editor: Tracy M. Cook. Digital Designer: Victoria Schumacher.

This report does not constitute a rating action.

Primary Credit Analyst:Jeanne L Shoesmith, CFA, Chicago + 1 (312) 233 7026;
Secondary Contacts:Barbara Castellano, Milan + 390272111253;
Xavier Jean, Singapore + 65 6239 6346;
Luis Manuel Martinez, Mexico City + 52 55 5081 4462;

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