The Health Of Business

Corporate, Financial Institution Downgrades On Pace for Record Increase

Pandemic leads to new peak level of annual downgrades

Fitch Ratings shows dramatic rise in corporate and financial institution downgrades and likely more to follow

Chicago-12 May 2020: Fitch Ratings’ corporate and financial institution downgrades from January-April have dramatically increased, owing to the economic crisis caused by the coronavirus pandemic. Global downgrades in just the first four months of the year have already exceeded the average annual total 2002-2019.

There were 58 downgrades in the first 10 weeks of 2020. A further 347 corporate and financial institution issuers have been downgraded for a total of 405 through the end of April. This includes 264 corporate downgrades and 141 in financial institutions.

Charts available here.

2009 Revisited

The most corporate and financial institution downgrades in a year occurred back in 2009 when Fitch lowered 747 ratings. Given the pace of downgrades since mid-March, we expect 2020 will represent a new peak level of annual downgrades.

There were 1068 negative rating actions taken in corporate and financial Institutions in 2020 through the end of April. Downgrades accounted for less than 40% of the negative actions, but the increased level of Negative Rating Outlooks and, to some extent, Negative Rating Watches signal more downgrades are likely during the remainder of 2020 and into 2021. Revisions to Rating Outlook Negative were the most common action, representing 50% of the negative moves, while placing issuers on Rating Watch Negative accounted for 12% of negative actions.

Muti-notch Downgrades

The most corporate and financial institution downgrades in a year occurred back in 2009 when Fitch lowered 747 ratings. Given the pace of downgrades since mid-March, we expect 2020 will represent a new peak level of annual downgrades...

Since 2002, an average of 35% of downgraded corporate and financial institution issuers have experienced a multi-notch rating downgrade change year over year. Multi-notch downgrades can consist of a single multi-notch rating action or a series of single-notch downgrades over a given period of time. The ratio of multi-notch downgrades is significantly higher for the years immediately after the past two credit cycle turning points in 2002 and 2009 when multi-notch downgrade rates, counted as multi-notch downgrades relative to total downgrades, were 45% and 46%, respectively.

In 1Q20, the multi-notch downgrade rate of both corporate and financial institution issuers was approximately 35%, which matches the historical annual average. However, the number of multi-notch downgrades in 1Q20 varied by sector, with 13% for financial institution issuers versus 44% for corporate issuers. Continued severe economic stress will likely translate into a multi-notch downgrade rate for 2020, which is higher than 35%.

Regional performance was generally consistent for the first quarter. The number of multi-notch downgrades came in slightly lower for Europe and Asia relative to North America and Latin America.

For information on all coronavirus-related rating activity, please see our Coronavirus Rating Snapshot page at www.fitchratings.com/topics/coronavirus. The data presented in this release match that used within Fitch’s transition and default studies. Thus, some downgrades may be duplicative if an organization has multiple issuer default ratings.

 

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.