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Credit Trends: 'BBB' Pulse: Downside Risks Remain

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Default, Transition, and Recovery: 2021 Annual International Public Finance Default And Rating Transition Study

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Credit Trends: U.S. Corporate Bond Yields As Of Sept. 28, 2022

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Default, Transition, and Recovery: 2021 Annual European Structured Finance Default And Rating Transition Study

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Default, Transition, and Recovery: 2021 Annual European Corporate Default And Rating Transition Study


Credit Trends: 'BBB' Pulse: Downside Risks Remain

This report does not constitute a rating action.

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A confluence of risks, including central banks' aggressive tightening of monetary policy, energy shocks from the ongoing Russia-Ukraine war, and heightened inflation and recession risk have stoked volatile market conditions this year. Confronted with these challenges, bond investors have found no safe harbor in investment grade, where rising yields triggered repricing, and indices of 'BBB' rated bonds fell more than 10% in both the U.S. and eurozone in the first half of the year. Despite challenges in the market, 'BBB' ratings have remained largely resilient this year as rising stars outnumber fallen angels.

However, given the mounting macroeconomic and geopolitical challenges, rating trends are likely reaching an inflection point where negative rating actions will outweigh positive actions. With this shift, downside risks remain.

Base Case Estimate: Fallen Angel Downgrades Rise 11%

Without a clear path for an upside surprise, we estimate that debt associated with nonfinancial corporate fallen angel downgrades could rise, reaching nearly $110 billion over the next 12 months for nonfinancial corporates in the U.S. and EMEA from July 1, 2022, through June 30, 2023. While this would mark an 11% increase in fallen angel debt from $98 billion over the past 12 months through June 30 (which includes the downgrades of Russian nonfinancial issuers with $67 billion of associated debt), it would also bring the fallen angel total near the annual average of the past decade. In this estimate, fallen angel downgrades would affect 2% of 'BBB' debt.

For the U.S., we estimate that nonfinancial corporate fallen angel downgrades would reach $75 billion, or 2.1% of 'BBB' debt. In EMEA, we estimate this would reach $34.8 billion, or 1.7%, of 'BBB' debt.

Chart 1

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Downside Scenario: Persistent Inflation And Energy Disruption

In addition to this baseline estimate, we are considering a downside scenario for fallen angel risk. We estimate fallen angel downgrades could rise to $176 billion, affecting 3.1% of 'BBB' nonfinancial debt.

By region, fallen angel downgrades in the downside scenario would rise to $122 billion (or 3.4% of 'BBB' debt) in the U.S. and to $54.5 billion (or 2.7% of 'BBB' debt) in EMEA. While 'BBB' category issuers would certainly be affected in the downside scenario, we would expect these issuers to be less affected than those at the lower end of the rating spectrum, where companies have less ability to pass through cost increases and more-limited financial flexibility.

Table 1

Fallen Angel Estimates: July 1, 2022, Through June 30, 2023
--Base case: Fallen angel estimates-- --Downside case: Fallen angel estimates--
Region Bil. $ % Bil. $ %
U.S. and EMEA 109.8 2.0 176.3 3.1
EMEA 34.8 1.7 54.5 2.7
U.S. 75.0 2.1 121.8 3.4
Data as of June 30, 2022. Nonfinancial projection from July 1, 2022, through June 30, 2023. EMEA--Europe, the Middle East, and Africa. Source: S&P Global Ratings Research.

We describe this downside scenario in "Global Credit Conditions Q3 2022: Resurfacing Credit Headwinds," published June 30, 2022.

In our view, this represents a reasonable downside scenario--with a roughly one-in-three likelihood of occurring. We base this scenario on two key assumptions:

U.S. inflation stays persistently high, necessitating more aggressive tightening by the Federal Reserve relative to our baseline economic forecast.

The energy market faces continued disruption linked to the unwinding of commercial relations with Russia and the prolonged Russia-Ukraine conflict. However, this downside scenario does not assume a complete EU embargo on Russian gas supplies or supply disruptions that require material rationing of production in Europe.

Under this scenario, economic activity would slow sharply in the second half of this year and into 2023 for both the U.S. and eurozone.

The U.S. would enter a recession, even as inflation stays above 8% in 2022 before declining, and 10-year Treasury yields would peak at about 4.8% in early 2023. U.S. GDP would contract 0.6% in 2023, while unemployment would stay elevated and reach 7.2% by late 2024.

In the eurozone, the energy market disruption and the recession in the U.S. would bring GDP growth down to 1.0% in 2023, about half that of our baseline economic forecast. Inflation in the second half of 2022 would force the European Central Bank to respond with steady, but faster rate hikes through early 2024. However, compared with the U.S., unemployment would be less affected given positive economic growth, stable labor markets, and high job vacancies. The U.K., in contrast, has a tighter labor market and rising wage pressure. Under the energy shock scenario, the Bank of England would front-load rate hikes and depress demand, leading to a growth recession in 2023.

Weighting The Estimates

In our base-case estimate for fallen angel downgrades, we assign hypothetical risk weights for each rating level ('BBB+', 'BBB', and 'BBB-') that we base on the downgrade rates to speculative grade from 'BBB' rating levels over a 12-month rolling horizon from 2010 through May 2022 (see table 6 in the appendix).

For the downside scenario, we based downgrade rates on those observed during 1990-1993. During that time, the U.S. also experienced a recession driven by Federal Reserve policy tightening and featuring higher inflation and an international energy shock (due to the Gulf War). While these similarities help to make the 1990s recession a helpful reference point for the current downside scenario, we would caution against drawing too close or detailed a parallel between this downside scenario and the developments leading up to and during any prior recession because numerous structural factors differ in each period.

U.S.: Recent Credit Improvements Provide A Temporary Buffer Against Downside Risk

The fallen angel estimate for the U.S. has risen over the past few months as credit may be reaching an inflection point. Even though rising stars have outnumbered fallen angels by 11 to 2 in the U.S. so far this year, these recent rising stars now add to the pool of debt from 'BBB-' issuers.

Chart 2

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Chart 3

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The rating bias for 'BBB' nonfinancials in the U.S. remains nearly neutral, with the negative bias (the share of issuer ratings with a negative outlook or CreditWatch) one percentage point lower than the positive bias (the share of issuer ratings with a positive outlook or CreditWatch). This suggests the slowing economy has yet to materially dent 'BBB' credit.

Chart 4

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We do not take our neutral rating bias to suggest that operating conditions will not deteriorate, but rather that any rating impact will likely be beyond the two-year horizon associated with the negative outlooks attached to investment-grade ratings. This is particularly relevant given that we are forecasting a shallow low-growth period into 2025, suggesting that the outlook bias will likely be weaker a year from now.

While the nearly neutral bias might seem unexpected given lingering supply-chain challenges, soaring inflation, and other looming macroeconomic concerns, there are two caveats to keep in mind that help limit the extent of the downside risk over the next 12 months.

First, many sectors enjoyed a rebound in 2021, when financial performance buoyed a roaring economy and consumer spending.   Except for sectors restricted by travel and social distancing mandates, most industries were operating at pre-pandemic levels by the beginning of 2022. Many issuers strengthened balance sheets and shored up liquidity during that period of exceptionally favorable financing conditions.

Second, sectors such as oil and gas, and certain metals and mining companies, are benefiting from the elevated commodity prices, given limited supply.   This remained true while other sectors suspended guidance or made downward revisions in the second quarter This earnings season, we're beginning to see companies acknowledging the likelihood of a risky road ahead by cutting costs, pausing hiring, and limiting spending, while still indicating that demand and margins remain relatively steady in most sectors.

We are seeing early signs of weakness in inflation-sensitive, consumer-facing sectors such as retail and restaurants, as well as consumer products. One U.S. fallen angel from the second quarter, Steelcase Inc., as well as two recent potential fallen angels (PFAs)--Kohl's Corp. and Ocean Spray Cranberries Inc.--were from these sectors. In each of these cases, however, the companies also faced specific challenges that led to the downgrade or outlook revision. For Steelcase, the structural shift for many workers to a hybrid work model weighed on the office furniture industry, while our outlook on Kohl's reflects the combination of softening consumer spending coupled with the risk of more shareholder-friendly actions from the firm. For Ocean Spray, we expect leverage to remain temporarily elevated if the company's efforts to offset input cost inflation do not take hold. While these sectors are feeling the pinch of shifting consumer preferences and waning demand, it will likely take time for these stresses to rise to a level that results in a downgrade, absent other company-specific factors.

We expect rising interest rates to weigh on any sector that relies on consumer financing to generate revenue, and the real estate sector is particularly sensitive. Rising mortgage costs have slowed home sales, and the sector was a drag on GDP estimates in second-quarter 2022. Somewhat surprisingly, the increase in interest rates doesn't yet seem to be affecting the auto sector.

For the tech sector, the net rating outlook remains relatively unchanged after merger and acquisition (M&A) announcements have had mixed effects on credit quality. We downgraded Oracle Corp., the largest 'BBB' rated issuer within the technology sector, to 'BBB' from 'BBB+' in June, reflecting the higher expected leverage following its acquisition of Cerner. Meanwhile, we placed our 'BBB-'rating on Broadcom Inc. on CreditWatch with positive implications in May following the company's announcement that it will acquire VMware Inc. for cash and stock.

More broadly, semiconductor companies' earnings show that consumer end markets are weak and getting weaker, while end markets for autos, industrials, telecoms, and data centers remain strong given resilient demand, meaningful backlog, and low inventory levels. Companies continue to spend on enterprise information technology, but we expect some tightening.

EMEA: As Pandemic Wanes, War Adds New Stresses

Following the initial credit shock of the Russia-Ukraine war, the percentage of 'BBB' issuers we downgraded has fallen back below that of the U.S. Looking forward, the negative and positive biases for 'BBB' nonfinancials in EMEA are now equal, at 10%.

Chart 5

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Chart 6

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The number of nonfinancial PFAs in EMEA has declined by three since the end of March, as some of the hardest-hit sectors of the pandemic have shown improved performance. One notable case, Abertis Infraestructuras S.A., had been the largest EMEA PFA (with about €19 billion of debt) before June, when we revised the outlook to stable from negative with the recovery of European toll road traffic to pre-pandemic levels. We took similar actions on ISS A/S, a facilities management company that reported better-than-expected performance despite challenging market conditions, and Informa PLC, a business-to-business events and digital services company that improved operating performance and credit metrics and gained financial flexibility following an asset sale.

Chart 7

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Demand for transportation and leisure have rebounded as COVID-19 restrictions have eased. Furthermore, operating performance appears to be improving for sectors affected by supply chain bottlenecks and now benefiting from solid order backlogs. However, the sustainability of these positive trends is uncertain through the end of this year and into next year as increasing inflation and the Russia-Ukraine conflict slow economic growth.

The downside scenario implies further inflation and lower economic growth that puts additional pressure on demand and operating margins.

That said, within the 'BBB' category, the operating margins of several utilities are already being pressured by rising energy prices, and these will be increasingly reflected in their costs as the renewals of their supply contracts take place. A harsher scenario increases this pressure.

Our downside scenario does not assume enough of a disruption in the supply of Russian gas to cause material rationing of usage in Europe. However, the current disruption in gas supply has already affected ratings through elevated prices, and local and central governments in the EU are taking actions to reduce gas usage and to source alternative supplies.

We downgraded Uniper SE, a German power generator that depends significantly on Gazprom's gas supply, to 'BBB-' in May, and on July 22, the German government announced that it will take a 30% stake in the company with a €15 billion rescue plan. Following that announcement, we removed the ratings from CreditWatch with negative implications and assigned a negative outlook. We are now treating this company as a government-related entity with a high likelihood of government support.

EP Infrastructure: In May, we downgraded this Slovakian gas transmission company to 'BBB-' and placed the ratings on CreditWatch with negative implications, reflecting the risk that the Russian gas provided to its subsidiary Eurostream can be significantly cut or suspended.

Petrol d.d.: We placed our 'BBB-' rating on this Slovenian issuer on CreditWatch with negative implications in July after the Slovenian government announced temporary measures to smooth the spike in energy prices. These measures resulted in a significant shortfall in EBITDA for the first half of 2022.

Tengizchevroil LLP: We placed our 'BBB-' rating on this Kazakh oil company on CreditWatch with negative implications in July because the company is exposed to the increasing risk of the suspension in operations of Caspian Pipeline Consortium, which carries virtually all of its oil to the Russian port of Novorossiysk.

We expect uncertainties over the oil and gas supply in EMEA to continue to weigh on credit, and this could lead to more fallen angel downgrades.

Chart 8

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Chart 9

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In Credit Markets, Rising Interest Rates Triggered 'BBB' Repricing

Investment-grade bonds provided little shelter from the storm of market volatility in the first half of the year. 'BBB' rated bonds faced their steepest downturn in more than eight years as aggressive tightening of monetary policy in the U.S. and the U.K. led to a rapid repricing of longer-duration debt.

The S&P U.S. Investment Grade Corporate Bond 'BBB' Index fell nearly 14% through June 30, and the S&P Eurozone BBB Investment Grade Corporate Bond Index fell close to 11%.

Widening credit spreads have contributed to the decline, but rising interest rates appear to account for much of the negative return. Shorter-duration two- to three-year government bond indices of U.S. treasuries and eurozone sovereign bonds fell just 2%-3% in the first half of the year, while longer-duration seven- to 10-year indices experienced drawdowns of near 11%--at or closer to the levels of the 'BBB' declines.

Chart 10

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Rising Yields Have Taken A Toll On 'BBB' Issuance

Facing rising yields, primary market issuance of 'BBB' bonds is down in both the U.S. (down 22%) and Europe (down 16%) through the first half of the year with average yields on new-issue 'BBB' bonds rising to 5.2% in the U.S. and 4.6% in Europe (in July). Also slowing issuance, 'BBB' rated nonfinancials entered 2022 with relatively light funding demands after many issued longer-term debt, at lower rates, in prior years.

Chart 11

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Chart 12

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After A Spike, The Cost Of Downgrades To Speculative Grade Returns Near Average

After market sentiment turned decidedly risk-off, spreads narrowed in July. The gap between 'BBB-' and 'BB+' bond spreads had widened past 100 basis points (bps) in June, marking a heightened increase in funding costs associated with speculative grade relative to investment grade. However, in July, this cost-of-a-notch narrowed back to 60 bps, as the 'BB' category spread rapidly tightened by 100 bps, while the 'BBB' spreads narrowed just slightly. At these levels, the increased cost of funding between investment- and speculative-grade remains only modestly higher than its long-term average since 2005.

Chart 13

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Year to date, 'BBB' corporate bond spreads in the U.S. have widened 74 bps to 198 bps as of July 29. As corporate bond spreads entered 2022 at such tight levels, this pronounced widening brings the 'BBB' spreads modestly wider than their average over the past 10 years.

Chart 14

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Appendix:

Chart 15

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Chart 16

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Table 2

Global Potential Fallen Angels
'BBB-' rated issuers with negative outlooks or on CreditWatch with negative implications
Subsector Issuer CreditWatch negative/negative outlook Country Debt (U.S. mil. $)
Homebuilders/real estate cos. Altarea SCA Negative France 1,833
Consumer products Anadolu Efes Biracilik ve Malt Sanayii AS Watch Neg Turkey 1,500
Financial institutions Argo Group International Holdings Ltd. Negative U.S. 275
Aerospace and defense Boeing Co. Negative U.S. 57,723
Financial institutions China Bohai Bank Co. Ltd. Negative China 300
Consumer products Conagra Brands Inc. Negative U.S. 11,758
Utilities EP Infrastructure Watch Neg Czech Republic 2,394
Utilities Eesti Energia AS Negative Estonia 509
Sovereign Emirate of Sharjah Negative U.A.E. 13,300
Utilities EnergyAustralia Holdings Ltd. Negative Australia 30
Telecommunications Eutelsat Communications S.A. Negative France 3,157
Transportation FirstGroup PLC Negative U.K. 638
Capital goods Fluor Corp. Negative U.S. 1,609
Transportation GXO Logistics Inc. Negative U.S. 800
Aerospace and defense Huntington Ingalls Industries Inc. Negative U.S. 2,150
Midstream Inter Pipeline Ltd. Negative Canada 4,527
Financial institutions Intercorp Financial Services Inc. Negative Peru 1,300
Media and entertainment JCDecaux S.A. Negative France 2,495
Media and entertainment Jinjiang International Holding Co. Ltd. Negative China 509
Retail/restaurants Kohl's Corp. Negative U.S. 3,700
Consumer products Li & Fung Ltd. Negative Bermuda 2,250
Consumer products Meituan Negative Cayman Islands 2,000
Retail/restaurants Metro AG Negative Germany 1,120
Automotive Nissan Motor Co. Ltd. Negative Japan 15,837
Consumer products Ocean Spray Cranberries Inc. Negative U.S. 150
Homebuilders/real estate cos. Office Properties Income Trust Negative U.S. 2,500
Oil and gas SK Innovation Co. Ltd. Negative Korea 500
Homebuilders/real estate cos. SL Green Realty Corp. Negative U.S. 10,400
Homebuilders/real estate cos. Samhallsbyggnadsbolaget i Norden AB Negative Sweden 6,417
Financial institutions Tanner Servicios Financieros S.A. Negative Chile 341
Oil and gas Tengizchevroil LLP Watch Neg Kazakhstan 2,250
Data as of July 31, 2022. 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. This debt may be rated above or below the issuer credit rating. Moreover, if a subsidiary's parent is itself a potential fallen angel, only the parent is counted. Source: S&P Global Ratings Research.

Table 3

Global Fallen Angels Year-To-Date
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
2/16/2022 Las Vegas Sands Corp. BB+ BBB- Media and entertainment U.S. 10,450
2/25/2022 Russian Federation BB+ BBB- Sovereign Russia 33,738
2/28/2022 Gazprombank JSC BB+ BBB- Financial institutions Russia 121
3/7/2022 Gazprom PJSC CCC- BBB- Oil and gas Russia 45,644
3/7/2022 NOVATEK PJSC CCC- BBB Oil and gas Russia 2,000
3/7/2022 Russian Railways JSC CCC- BBB- Utilities Russia 6,712
3/7/2022 MMC Norilsk Nickel PJSC CCC- BBB- Metals, mining, and steel Russia 5,750
3/7/2022 PhosAgro PJSC CCC- BBB- Chemicals, packaging, and environmental services Russia 2,000
3/7/2022 Holding Co. Metalloinvest JSC CCC- BBB- Metals, mining, and steel Russia 650
3/7/2022 RusHydro PJSC CCC- BBB- Oil and gas Russia 527
3/7/2022 Severstal PAO CCC- BBB- Metals, mining, and steel Russia 1,500
3/7/2022 NLMK PJSC CCC- BBB- Metals, mining, and steel Russia 1,200
3/7/2022 Sovcomflot PAO CCC- BBB- Transportation Russia 1,180
3/15/2022 Petroleos del Peru Petroperu S.A. BB+ BBB- Oil and gas Peru 2,000
4/1/2022 Steelcase Inc. BB+ BBB- Consumer products U.S. 450
5/23/2022 UPL Corp. Ltd. BB+ BBB- Chemicals, packaging, and environmental services Mauritius 1,200
7/4/2022 Crown Resorts Ltd. BB- BBB Media and entertainment Australia 619
7/13/2022 Atos SE BB BBB- High technology France 1,916
Data as of July 31, 2022. 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. This debt may be rated above or below the issuer credit rating. Moreover, if a subsidiary's parent is itself a fallen angel, only the parent is counted. Source: S&P Global Ratings Research.

Table 4

Global Potential Rising Stars
Issuers rated 'BB+' with positive outlooks or on CreditWatch with positive implications
Subsector Issuer CreditWatch negative/negative outlook Country Debt amount (U.S. mil. $)
Metals, mining, and steel Alcoa Corp. Positive U.S. 4,500
Media and entertainment Aristocrat Leisure Ltd. Positive Australia 3,805
Financial institutions Axis Bank Ltd. Positive India 595
Aerospace and defense Booz Allen Hamilton Inc. Positive U.S. 2,368
Utilities Cheniere Energy Inc. Positive U.S. 28,153
Media and entertainment CoStar Group Inc. Positive U.S. 1,000
Health care Convatec Group PLC Positive U.K. 500
Midstream DCP Midstream L.P. Positive U.S. 5,575
Financial institutions FleetCor Technologies Inc. Positive U.S. 5,125
Media and entertainment Flutter Entertainment PLC Positive Ireland 13,502
Automotive Ford Motor Co. Positive U.S. 113,000
Media and entertainment Hyatt Hotels Corp. Positive U.S. 3,700
Capital goods Ingersoll Rand Inc. Positive U.S. 5,740
Financial institutions LPL Holdings Inc. Positive U.S. 3,670
Aerospace and defense Leonardo SpA Positive Italy 1,630
Automotive Lithia Motors Inc. Positive U.S. 1,750
Media and entertainment Mattel Inc. Positive U.S. 2,600
Metals, mining, and steel Minsur S.A. Positive Peru 500
Financial institutions New York Community Bancorp Inc. Positive U.S. 1,040
Financial institutions Newmark Group Inc. Positive U.S. 550
High technology Nokia Corp. Positive Finland 3,546
Chemicals, packaging, and environmental services Olin Corp. Positive U.S. 3,315
Telecommunications T-Mobile US Inc. Watch Pos U.S. 76,930
Utilities Teollisuuden Voima Oyj Positive Finland 3,829
Automotive Tesla Inc. Positive U.S. 1,840
Capital goods The Weir Group PLC Positive U.K. 800
Homebuilders/real estate cos. Toll Brothers Inc. Positive U.S. 2,000
Chemicals, packaging, and environmental services Verallia S.A. Positive France 1,019
Automotive Volvo Car AB Positive Sweden 2,335
Data as of July 31, 2022. 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. This debt may be rated above or below the issuer credit rating. Moreover, if a subsidiary's parent is itself a potential rising star, only the parent is counted. Source: S&P Global Ratings Research.

Table 5

Global Rising Stars Year To Date
Date Issuer To From Sector/subsector Country Rated debt affected (mil. $)
1/5/2022 Magellan Health Inc. BBB- BB+ Financial institutions U.S. 400
1/6/2022 CIT Group Inc. (First Citizens BancShares Inc.) BBB+ BB+ Financial institutions U.S. 5,126
1/28/2022 Western Midstream Operating L.P. BBB- BB+ Utilities U.S. 7,620
2/4/2022 MasTec Inc. BBB- BB+ Capital goods U.S. 600
2/11/2022 Newell Brands Inc. BBB- BB+ Consumer products U.S. 7,310
2/24/2022 Targa Resources Corp. BBB- BB+ Utilities U.S. 16,446
2/25/2022 Texas Capital Bancshares Inc. BBB- BB+ Financial institutions U.S. 1,100
3/11/2022 Kraft Heinz Co. (The) BBB- BB+ Consumer products U.S. 25,334
3/28/2022 EQT Corp. BBB- BB+ Utilities U.S. 5,260
4/11/2022 OCI N.V. BBB- BB+ Chemicals, packaging, and environmental services Netherlands 2,031
4/11/2022 Yamana Gold Inc. BBB- BB+ Chemicals, packaging, and environmental services Canada 1,550
4/13/2022 Huntsman Corp. BBB- BB+ Chemicals, packaging, and environmental services U.S. 1,877
4/18/2022 VICI Properties Inc. BBB- BB Media and entertainment U.S. 4,750
4/28/2022 Gold Fields Ltd. BBB- BB+ Metals, mining, and steel South Africa 1,000
5/3/2022 Continental Resources Inc. BBB- BB+ Oil and gas U.S. 8,500
5/18/2022 Essential Properties Realty Trust Inc. BBB- BB+ Homebuilders/real estate cos. U.S. 400
5/25/2022 HCA Healthcare Inc. BBB- BB+ Health care U.S. 44,194
6/2/2022 JBS S.A. (J&F Investimentos S.A.) BBB- BB+ Consumer products Brazil 18,850
6/2/2022 Emaar Properties PJSC BBB- BB+ Homebuilders/real estate cos. U.A.E. 5,000
6/7/2022 Autostrade per I'Italia SpA (Atlantia SpA) BBB- BB Utilities Italy 11,967
Data as of July 31, 2022. Rising stars are defined as speculative-grade issuers currently with bonds outstanding that have been upgraded into 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, 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. This debt may be rated above or below the issuer credit rating. Moreover, if a subsidiary's parent is itself a rising star, only the parent is counted. Source: S&P Global Ratings Research.

Hypothetical Fallen Angel Downgrade Scenario Analysis Approach

This hypothetical scenario analysis includes parent firms in the U.S. and EMEA rated in the 'BBB' category and all qualifying debt in their organizational hierarchies, as well as the qualifying debt of subsidiaries rated in the 'BBB' category if their parents are assigned other ratings. Reported debt includes secured and unsecured bank loans, subordinated debt, medium-term notes, preferred stock, convertible debt, and drawdowns under medium-term note programs. It does not include commercial paper programs, shelf registrations, revolvers, or certificates of deposit.

The hypothetical risk weights for each rating level ('BBB+', 'BBB', and 'BBB-') approximate the relative long-term fallen angel rates in the U.S. and EMEA regions combined over a 12-month rolling horizon from 2010 through May 2022 (see table 6).

The risk weights applied to the negative and positive outlooks and CreditWatch statuses represent estimates for fallen angel potential given current economic conditions--with far more fallen angel risk among companies rated 'BBB-' and on CreditWatch with negative implications, and essentially no fallen angel risk weight for companies rated in the 'BBB' category with positive outlooks. The risk weights applied to each rating level reflect the downgrade rates that could be expected for that rating level given the average annual fallen angel rates since 2010, adjusted for outlooks and CreditWatch statuses. We then multiplied the debt distribution by each corresponding risk weight in this scenario and summed the total. We used this to calculate a hypothetical downgraded debt amount over the next 12 months.

Table 6

Hypothetical Fallen Angel Scenario Risk Weights
(%)
Base case scenario weights
Outlook/CreditWatch BBB+ BBB BBB-
Positive outlook or CreditWatch 0.00 0.00 0.00
Stable outlook 0.21 0.82 4.25
Negative outlook 1.00 5.00 20.00
Negative CreditWatch 3.00 15.00 50.00
Avg rate downgrade to Speculative-grade over a 12-month horizon (Jan 2010 - May 2022) 0.33 1.44 6.90
Downside scenario weights
Outlook/CreditWatch BBB+ BBB BBB-
Positive 0.00 0.00 0.00
Stable 0.48 1.01 6.92
Negative outlook 3.00 7.50 30.00
Negative CreditWatch 10.00 22.50 75.00
Average rate downgrade to speculative-grade over a 12-month horizon (January 1990 to December 1993) 1.05 2.95 12.01
Sources: S&P Global Ratings Research and S&P Global Market Intelligence's CreditPro®.

Related Research

Primary Credit Analysts:Evan M Gunter, Montgomery + 1 (212) 438 6412;
evan.gunter@spglobal.com
Barbara Castellano, Milan + 390272111253;
barbara.castellano@spglobal.com
Chiza B Vitta, Dallas + 1 (214) 765 5864;
chiza.vitta@spglobal.com
Vincent R Conti, Singapore + 65 6216 1188;
vincent.conti@spglobal.com
Secondary Contacts:Nick W Kraemer, FRM, New York + 1 (212) 438 1698;
nick.kraemer@spglobal.com
Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Research Contributors:Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Nivritti Mishra Richhariya, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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