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Credit Quality: Downgrades Pick Up Pace

As coronavirus fears disrupt the economy, CFO is tracking the weakening in corporate credit ratings and the companies under stress.

As the coronavirus spreads across the globe, real economic effects are starting to emerge, and not just in the travel industry. For example, on Wednesday, IDC said its forecast for information technology spending this year would most likely be adjusted downward, to as low as 1% (versus the original projected 4%) in the worst-case downside scenario.

“Based on data indicators in the first quarter, IDC expects to see a significant slowdown in spending on hardware in particular during the first half of 2020 with software and services spending also affected as the crisis reverberates through all sectors of the economy, including supply chains, trade, and business planning,” the research firm stated.

The production and pricing turmoil in the global oil markets and the volatility in equities mean corporates face a three-pronged threat. Many will have to survive on thinner equity cushions and will draw down their credit lines. The overall effects could tip companies with speculative-grade credit ratings, many of whom were already facing secular industry headwinds, into crisis and even bankruptcy.

While a wave of defaults is not imminent, credit rating agencies are beginning to foresee problems for some companies, so downgrades and credit-watch alerts are accelerating. The amount of corporate debt rated speculative could climb: about one-half of the $6.6 trillion investment-grade corporate bond market is rated “BBB,” the lowest category before falling into speculative-grade, or “junk-bond” status.

Moody’s said on Wednesday that it had raised its baseline corporate bond default rate projection for year-end 2020 to 3.6% from 3.4%, “based on rising risks to growth, commodity prices, and financial markets amid the coronavirus outbreak.” Under a more pessimistic scenario, the default rate would go up to 9.7%, the credit rating agency stated.

To track the corporate downgrades and companies put on negative credit watch, as well as industry-specific credit concerns, CFO will be regularly posting news of credit rating moves and warnings from the major agencies.

Sabre

Standard & Poor’s downgraded Sabre, the travel technology solutions company, to “BB-” on increased leverage from elevated technology spending. S&P said the downgrade reflects its view that Sabre’s adjusted net leverage will increase above 6x in 2020 from 4.1x in 2019. The causes? The company’s planned $150 million of incremental technology spending and theā€¦

Vincent Ryan

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