articles Ratings /ratings/en/research/articles/210729-credit-trends-bbb-pulse-improving-business-conditions-boost-rising-star-upgrades-12051055 content esgSubNav
In This List
COMMENTS

Credit Trends: 'BBB' Pulse: Improving Business Conditions Boost Rising Star Upgrades

COMMENTS

Default, Transition, and Recovery: Array Canada Becomes The First Default In September

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of Sept. 22, 2021

NEWS

2020 Annual European Structured Finance Default And Rating Transition Study Published

COMMENTS

Default, Transition, and Recovery: 2020 Annual European Structured Finance Default And Rating Transition Study


Credit Trends: 'BBB' Pulse: Improving Business Conditions Boost Rising Star Upgrades

The Corporate Recovery Continues To Drive Improving Credit Quality

The economic recovery in major economies, particularly in the U.S. and China, continues to drive faster-than-expected recoveries in credit metrics across a number of sectors (see "'BBB' Pulse: Most 'BBB' Debt Is Now On Track For A Near-Term Recovery," July 7, 2021). This, along with funding costs that are still close to last year's lows, continues to translate into favorable trends for issuers at the edge of investment- and speculative-grade.

This year's count of fallen angels (issuers that were downgraded to speculative-grade from investment-grade) remains low, at 12, while the number of potential fallen angels (issuers rated 'BBB-' with either a negative outlook or CreditWatch) has fallen sharply compared to last year's peak. This improvement is reflected across most sectors, with the negative biases falling compared to mid-2020. Many of the sectors with the largest decreases in negative bias over the past year are those that were hardest hit by the pandemic, including automotive, media and entertainment, oil and gas, and retail. While all sectors have improved since last year, most sectors have also improved since the end of March.

Chart 1

image

In contrast, rising stars (issuers that were upgraded to investment-grade from speculative-grade) continue to gradually increase, with a steady pipeline of potential rising stars (issuers rated 'BB+' with either a positive outlook or CreditWatch). More interestingly, the strong performance of these issuers has been the rationale for most of these upgrades since March, after mergers and acquisitions (M&A) were cited as the main rationale for most of the rising stars in the first quarter.

As we mentioned in our previous report, historical trends suggest that large spikes in fallen angels during downturns tend to be followed by more modest increases in rising stars in the subsequent recoveries. That remains the case this year, but it is clear that, so far, credit trends are showing more positive rating actions.

Strong Business Performance Becoming The Main Rationale For Rising Stars

June saw one rising star in Lennar Corp., which was upgraded to 'BBB-' after establishing a multiyear track record of debt reduction and strong earnings that stemmed from its good industry position.

This brought the total number of rising stars this year to 17, already 10 more than for full-year 2020 and matching the count from full-year 2019. The rationales for most of these upgrades have cited M&A (with six) and strong operating performance, (with eight). While M&A accounted for most of the upgrades in the first quarter, improving operating performance accounted for more of the upgrades in the second quarter as the recovery among corporates accelerated.

Chart 2

image

Similarly, the count of potential rising stars remained at 19, unchanged from May. Clipper Acquisitions Corp., which saw its outlook revised to positive on the back of strong momentum from net inflows, was added to the list in June. May also saw four additions to the list-- Holding Co. Metalloinvest JSC, KION Group, Texas Capital Bancshares, and The Weir Group--all related to business performance rationales.

Two sectors account for most of the potential rising stars. Financial institutions leads with six, many of which are benefiting from better loss-absorbing capacity driven by the economic recovery combined with supportive government policies (see "Global Banking Country Outlook Midyear 2021: Tantalizing Signs Of Stability," July 22, 2021). Metals, mining, and steel follows with five, where higher commodity prices combined with increases in production capacity are resulting in positive outlook revisions.

Chart 3

image

No New Fallen Angels In June 2021, As Potential Fallen Angels Further Decline

There were no new fallen angels in June after five in May. Even in May, three of the corporate fallen angels were related to the downgrade of Colombia's sovereign rating to speculative-grade. As such, the pace of fallen angel downgrades continues to slow.

This is more clearly seen when looking at the shrinking pool of potential fallen angels, which is now down to 59. This marked a net decrease of six--with nine removals and three additions in June. This total count is now less than half of its all-time high of 126 in June 2020.

Chart 4

image

The nine removals were Capri Holdings, Choice Hotels International, Citycon Oyj, ICICI Bank, Immofinanz, Madrilena Red de Gas, Nexteer Automotive Group, PVH Corp., and Virgin Money UK. Almost all removals reflected rating outlooks that were revised to stable. The only exception was Nexteer Automotive Group, which no longer had publicly-rated debt outstanding at the end of June.

The three additions to the list had more idiosyncratic rationales:

  • French property developer Altarea SCA had its outlook revised to negative after announcing plans to acquire real estate asset manager Primonial, which could lead to less stable and predictable EBITDA.
  • Canada-based real estate developer and manager First Capital Real Estate Investment Trust had its outlook revised to negative due to uncertainty around the timing and extent of its credit protection measures.
  • Kentucky-based natural gas pipeline operator Southern Star Central Corp. had its outlook revised to negative, reflecting our expectation that leverage metrics will remain elevated due to its asset modernization program.

Most Sectors Are On The Mend, At Least Gradually

Media and entertainment continues to have the most potential fallen angels with 11, as the lodging and leisure subsector remains one of the most hard-hit by the pandemic.

The financial institutions sector follows with 10. However, because of the high number of investment-grade entities in this sector, the proportion of potential fallen angels as a share of the investment-grade population for financial institutions is low. Trailing these two sectors are consumer products and homebuilders and real estate, each with five potential fallen angels.

Chart 5

image

While many of the potential fallen angels are concentrated in a few sectors, it is illuminating that nearly all sectors have seen improvement over the past 12 months, and most have shown improvement over the past three months as well. Over the past 12 months, the negative bias among the 'BBB-' rated issuers dropped for 15 out of 19 sectors. For the other four sectors, negative bias was largely unchanged over the past year, coming from a low base. As shown on Chart 1, the negative bias has declined by double digits percentage points in six sectors over the past three months as improving business conditions are being reflected across the board.

Table 1

12 Fallen Angels Through June 30, 2021
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
5/20/2021 Ecopetrol S.A. BB+ BBB- Oil and gas Colombia 9,850
5/20/2021 Grupo de Inversiones Suramericana S.A. BB+ BBB- Diversified Colombia 550
5/20/2021 Financiera de Desarrollo Territorial S.A. FINDETER BB+ BBB- Financial institutions Colombia 500
5/19/2021 Republic of Colombia BB+ BBB- Sovereign Colombia 30,184
5/6/2021 ProAssurance Corp. BB BBB- Insurance U.S. 250
4/22/2021 G4S PLC (Allied Universal Topco LLC) B BBB- Consumer products U.K. 1,867
4/16/2021 OCP S.A. BB+ BBB- Chemicals, packaging, and environmental services Morocco 2,850
4/2/2021 Kingdom of Morocco BB+ BBB- Sovereign Morocco 8,773
3/25/2021 Empresa Nacional del Petroleo BB+ BBB- Utilities Chile 2,480
3/16/2021 Host Hotels & Resorts Inc. BB+ BBB- Media and entertainment U.S. 4,750
2/17/2021 TechnipFMC Plc BB+ BBB+ Oil and gas U.K. 2,572
2/5/2021 Hexcel Corp. BB+ BBB- Aerospace and defense U.S. 700
Data as of June 30, 2021. Fallen angels are defined as investment-grade issuers currently with bonds outstanding that have been downgraded into 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, 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. Source: S&P Global Ratings Research.

Table 2

Potential Fallen Angels Count Drops To 59; CW Negative Placements Remain At Four
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$)
Aerospace and defense Boeing Co. Negative U.S. 60,073
Automotive Nissan Motor Co. Ltd. Negative Japan 17,387
Automotive Zhejiang Geely Holding Group Co. Ltd., Negative China 3,255
Capital goods Flowserve Corp. Negative U.S. 1,300
Capital goods Fluor Corp. Negative U.S. 1,697
Capital goods Westinghouse Air Brake Technologies Corp. Negative U.S. 3,500
Chemicals, packaging, and environmental services Beijing Haidian State-Owned Asset Investment Group Co. Ltd. Negative China 500
Chemicals, packaging, and environmental services UPL Corp. Ltd. Negative Mauritius 1,200
Consumer products ISS A/S Negative Denmark 2,506
Consumer products Meituan Negative Cayman Islands 2,000
Consumer products Molson Coors Beverage Co. Negative U.S. 7,355
Consumer products Steelcase Inc. Negative U.S. 450
Consumer products Suedzucker AG Negative Germany 1,790
Financial institutions AIB Group PLC Negative Ireland 8,164
Financial institutions Argo Group International Holdings Ltd. Negative U.S. 275
Financial institutions Bank of Ireland Group PLC Negative Ireland 8,366
Financial institutions FCE Bank PLC Negative U.K. 5,941
Financial institutions Golub Capital BDC, Inc Negative U.S. 800
Financial institutions Intercorp Financial Services Inc. Negative Peru 600
Financial institutions Marex Group PLC Negative U.K. 56
Financial institutions Prospect Capital Corp. Negative U.S. 7,425
Financial institutions Tanner Servicios Financieros S.A. Negative Chile 354
Financial institutions BrightSphere Investment Group Inc. Watch Neg U.S. 400
Forest products and building materials Domtar Corp. Watch Neg U.S. 500
Forest products and building materials Standard Industries Inc. Watch Neg U.S. 5,005
Health care Perrigo Co. plc Negative Ireland 1,200
High technology Rakuten Group Inc. Watch Neg Japan 3,743
Homebuilders/real estate companies Altarea SCA Negative Yes France 2,148
Homebuilders/real estate companies Brookfield Property REIT Inc. Negative U.S. 13,700
Homebuilders/real estate companies China Jinmao Holdings Group Ltd. Negative Hong Kong 1,050
Homebuilders/real estate companies First Capital Real Estate Investment Trust Negative Yes Canada 1,905
Homebuilders/real estate companies SL Green Realty Corp. Negative U.S. 10,750
Media and entertainment Amadeus IT Group S.A. Negative Spain 5,370
Media and entertainment Expedia Group Inc., Negative U.S. 9,426
Media and entertainment Genting New York LLC Negative U.S. 525
Media and entertainment Hyatt Hotels Corp. Negative U.S. 2,950
Media and entertainment ITV PLC Negative U.K. 2,029
Media and entertainment Informa PLC Negative U.K. 2,833
Media and entertainment InterContinental Hotels Group PLC Negative U.K. 2,892
Media and entertainment JCDecaux S.A. Negative France 2,327
Media and entertainment Las Vegas Sands Corp. Negative U.S. 10,300
Media and entertainment Marriott International Inc. Negative U.S. 10,387
Media and entertainment Resorts World Las Vegas LLC Negative U.S. 1,750
Merchant Power Enable Midstream Partners, LP Negative U.S. 1,850
Metals, mining, and steel Cameco Corp. Negative Canada 811
Metals, mining, and steel Carpenter Technology Corp. Negative U.S. 600
Midstream Southern Star Central Corp Negative Yes U.S. 750
Oil and gas SK Innovation Co. Ltd., Negative Korea 500
Retail/restaurants Metro AG Negative Germany 1,999
Telecommunications Bharti Airtel Ltd. Negative India 4,755
Telecommunications CAS Holding No.1 Ltd. Negative British Virgin Islands 3,539
Transportation Avolon Holdings Ltd. Negative Cayman Islands 9,674
Transportation FirstGroup PLC Negative U.K. 729
Transportation Stagecoach Group PLC Negative U.K. 556
Transportation easyJet PLC Negative U.K. 3,222
Utilities Abertis Infraestructuras S.A. Negative Spain 21,827
Utilities Eesti Energia AS Negative Estonia 597
Utilities Indigo Group S.A. Negative France 2,357
Utilities PT Pelabuhan Indonesia III (Persero) Negative Indonesia 500
Data as of June 30, 2021. 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, 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. Source: S&P Global Ratings Research.

Table 3

17 Rising Stars In 2021 So Far
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
09-Jun-21 Lennar Corp. BBB- BB+ Homebuilders/real estate companies U.S. 5,000
26-May-21 CDW Corp. BBB- BB+ High technology U.S. 6,940
06-May-21 Double Eagle III Midco 1 LLC (DoublePoint Energy, LLC) BBB B- Oil and gas U.S. 550
22-Apr-21 Qorvo Inc., BBB- BB+ High technology U.S. 1,550
12-Apr-21 Sovcomflot PAO BBB- BB+ Transportation Russia 750
09-Apr-21 MDC Holdings Inc. BBB- BB+ Homebuilders/real estate companies U.S. 900
08-Apr-21 Shimao Group Holdings Ltd. BBB- BB+ Homebuilders/real estate companies Cayman Islands 2,100
05-Apr-21 PulteGroup Inc., BBB- BB+ Homebuilders/real estate companies U.S. 2,097
30-Mar-21 Triton International Ltd. BBB- BB+ Transportation Bermuda 6,098
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
24-Feb-21 Smurfit Kappa Group PLC BBB- BB+ Forest products and building materials Ireland 2,125
23-Feb-21 Advanced Micro Devices Inc. BBB- BB+ High technology U.S. 1,305
01-Feb-21 Norbord Inc. BBB- BB Forest products and building materials Canada 665
13-Jan-21 Parsley Energy, LLC. BBB BB Oil and gas U.S. 4,750
08-Jan-21 Fiat Chrysler Automobiles N.V. BBB- BB+ Automotive Netherlands 25,561
07-Jan-21 WPX Energy Inc. BBB- BB- Oil and gas U.S. 4,750
Data as of June 30, 2021. Source: S&P Global Ratings Research.

Table 4

19 Potential Rising Stars
'BB+' rated issuers with positive outlooks or on CreditWatch with positive implications
Subsector Issuer CreditWatch positive/positive outlook New to the list this month Country Debt amount (mil. US$)
Automotive Volvo Car AB (Zhejiang Geely Holding Group Co., Ltd.) Positive Sweden 2,555
Capital goods KION Group AG Positive Germany 597
Capital goods The Weir Group PLC Positive U.K. 800
Chemicals, packaging and environmental services Alpek, S.A.B. de C.V. (Alfa S.A.B. de C.V.) Positive Mexico 2,050
Financial institutions Cadence Bancorp. (Cadence Bancorp LLC) Watch Pos U.S. 85
Financial institutions CIT Group Inc., Watch Pos U.S. 5,151
Financial institutions Clipper Acquisitions Corp. Positive Yes U.S. 675
Financial institutions FleetCor Technologies Inc., Positive U.S. 4,190
Financial institutions New York Community Bancorp Inc., Positive U.S. 1,040
Financial institutions Texas Capital Bancshares Inc. Positive U.S. 1,100
High technology Dell Technologies Inc. Watch Pos U.S. 95,436
Insurance Magellan Health Inc. Watch Pos U.S. 400
Media and entertainment Netflix Inc. Positive U.S. 15,569
Metals, mining and steel Gold Fields Ltd. Positive South Africa 1,000
Metals, mining and steel Holding Co. Metalloinvest JSC Positive Russia 800
Metals, mining and steel Minsur S.A. (Breca Mineria S.A.C. and Subsidiaries) Positive Peru 450
Metals, mining and steel Yamana Gold Inc. Positive Canada 1,800
Metals, mining and steel Zijin Mining Group Co. Ltd. Positive China 350
Utilities Hrvatska Elektroprivreda d.d. Positive Croatia 550
Data as of June 30, 2021. 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, 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. Source: S&P Global Ratings Research.

Related Research

This report does not constitute a rating action.

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

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back