A report issued April 27 by Fitch Ratings reveals that a majority of sectors across corporates, financial institutions, infrastructure, public finance, sovereigns and structured finance would experience heavy Rating Outlook and Watch activity, as well as numerous ratings changes, in the event of a downside coronavirus scenario involving renewed large-scale lockdowns across major economies and double-dip slowdowns that delay any meaningful recovery beyond 2021.
Earlier in April, Fitch published details of its baseline and downside coronavirus cases against which all ratings groups globally are evaluating the pandemic’s impact. Rating actions are to be taken in line with expected credit trajectories under the baseline scenario, while the downside scenario provides a consistent context for analyzing further downside risks.
Relative to Fitch’s baseline, its downside scenario includes an even sharper contraction in major economies in 2020. However, the principal point of differentiation with its base case is in the recovery trajectory. Whereas Fitch’s baseline assumptions include severe contractions during the 2-3 month lockdown periods we anticipate in many major economies, followed by above-average growth next year, our downside scenario includes a much more prolonged recovery phase with a delayed return to pre-crisis levels of economic output. Details of Fitch’s baseline and downside cases can be found in its special reports “Global Economic Outlook” and “Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases,” available through the link provided below.
As part of their process to evaluate the potential impact of the downside scenario, Fitch has released a heat map outlining relative vulnerabilities across sectors globally. A sector-by-sector list with an accompanying heat map chart can be found in the top link. For each group, they assessed individual sectors on a range from those that would likely experience a very limited or mild ratings impact those where we would expect a high impact, with most or all ratings negatively affected.
For sovereigns, six of seven regions would likely experience a medium/high to high level of ratings impact in the event of our downside scenario. Fitch expects Latin America to be the most vulnerable owing to the region’s high commodity exposure and limited ratings headroom as well as some countries’ weak fiscal position and high public debt. North America and supranationals would be vulnerable to some Outlook changes but would be relatively less vulnerable than other regions.
Vulnerabilities would be similarly broad for financial institutions across regions, with the majority of assessed sectors in North America, EMEA, APAC, and LATAM expected to experience a medium/high to high impact. Certain non-bank financial institutions (NBFIs) and insurance sectors would be less exposed, with securities firms, investment asset managers, and non-life insurers/reinsurers experiencing a medium rating impact that may include Outlook changes and some possible rating changes.
Among global corporate sectors, commodities, airlines and those exposed most to discretionary spending, including non-food retail and gaming, lodging and leisure, would be the most vulnerable to a ratings impact during our downside scenario. By contrast, traditionally defensive sectors, including utilities, telecommunications, healthcare, food retail and food, beverage, and tobacco, would only likely see a mild to modest impact with few potential rating changes and some Outlook changes.
Similar variables would feed through to global infrastructure, with airports and oil and gas among the sectors most vulnerable. Power, energy, and other transport would be less exposed but would still likely experience a medium impact, including outlook changes and some possible rating changes.
Public finance includes a mix of sectors that would likely experience a medium to medium/high ratings impact, with local and regional governments and some non-profits on the more vulnerable end, while U.S. higher education, tax-exempt housing and public utilities would be less at risk. For structured finance, the large majority of transactions are in sectors expected to experience a medium to high or high ratings impact in the downside scenario. Downgrades are most likely for
non-investment-grade notes and for less-seasoned transactions. However, some downgrades of “AAAs” and other senior notes would likely be in the most vulnerable sectors.
Fitch’s full downside scenario risk heat map, including a list of 161 sectors, can be found in the spreadsheet available through the link below.