Pandemic-Driven Global Corporate Rating Actions Continue To Reverse - Fitch Ratings
The reversal of negative global corporate rating actions due to the economic fallout of the coronavirus is continuing as pressure from the pandemic recedes but the pace of stabilization varies by region and sector, says Fitch Ratings.
The rating trajectory of 37% of issuers experiencing an Outlook revision or downgrade started to improve, as of May 31, compared with 24% on March 31 and 9% at YE 2020. Ratings and Outlooks for 43% of issuers have yet to improve, 11% were withdrawn and 9% defaulted.
Some of the defaulted issuers were re-rated, typically in the ‘CCC’ category, based on their respective pro forma capital structures. Fitch is tracking roughly 500 issuers to assess rating reversal patterns. Analyzing these trends will lead to a better understanding of how ratings recover from severe and unanticipated shocks to operations. About two-thirds of the reversal starts are tied to scenarios where the issuer’s Rating Outlook was revised to Stable from Negative.
The balance is related to upgrade scenarios but only 6% of issuer ratings returned to prepandemic levels or higher. Of the issuers where pandemicrelated rating actions have not started to reverse, 68% have a Negative Outlook or are on Rating Watch Negative, with slightly more than half of these companies also being downgraded. The remaining 32% were downgraded with a Stable Outlook.
The mix of rating actions in the cohort of issuers where rating actions started to reverse, or have yet to start a reverse, was relatively stable over the past few months. Ratings and Outlooks of 61% of issuers in EMEA have yet to start a reverse, compared with about 40% in North America, APAC and Latin America (LatAm), as of May 31.
The percentage of EMEA issuers that have yet to begin a reverse in March was 75%, while it was 50%-55% elsewhere. The lagging recovery in EMEA is due in part to the rebound in oil prices having a more muted effect, as the oil & gas sector only makes up 8% of the affected ratings and represents 26% of impacted ratings in North America and 23% in LatAm.
Issuers in sectors acutely affected by the pandemic such as leisure, transportation and aerospace, represent 18% of the issuers in our sample. Of these, only about a quarter started to reverse. Most of the those that have yet to start reversing were downgraded and remain on Negative Outlook.
For issuers in sectors Fitch deems as having elevated pandemic related risk, namely the media and real estate sectors, the reversal pace was faster with a third having started to reverse. This is up from almost none in March. Issuers in these sectors represent 9% of our sample. Reversals for issuers in sectors designated as having moderate risk, including oil & gas and retail, were already well advanced by March with a third of them starting to reverse by then. This advanced to 38% by May 31.
These issuers represent 26% of our sample. Oil & gas accounted for 78% of the issuers in sectors designated as having moderate risk. The sector was especially hard hit early on in the pandemic, representing 32% of the defaults in our sample. Fitch downgraded 24 issuers in the oil & gas sector in March alone last year. However, in 2021 rating momentum is positive for the sector, with upgrades equaling or outpacing downgrades each month.