Credit data: coronavirus takes toll on corporates

Financials weathered the first phase of the lockdowns, but most other sectors were hit hard

As governments move to ease the lockdowns put in place to slow the spread of the coronavirus, the financial blow to businesses is coming into sharper focus. The latest Credit Benchmark data for April 2020 reveals sharp deteriorations across a swath of industries.  

Oil and gas companies were the worst hit, with 92% of credit movement in April to the downside. The sector faces severe challenges.

The price of West Texas Intermediate crude dropped from $47 a barrel (/bbl) at the start of March to well below $20/bbl in April. While prices had recovered to $31/bbl as of March 18, that’s still less than the $37/bbl to $45/bbl average breakeven cost for the 6,000 or so shale producers in the US.

Analysts at Mizuho Securities estimate 70% of these companies could be forced into bankruptcy before the cycle turns.  

Commodity companies in the basic materials sector also saw their outlook darken, with 87% seeing credit deterioration. As expected, consumer services followed a similar pattern, with deterioration accounting for 86% of credit movement in April.

There are also some surprises, though. The telecommunications sector might have been expected to benefit from remote working. But 85% of these companies saw their credit quality worsen, compared with 82% of corporates on average. On the other hand, financials appear to have weathered the initial storm, with improvements accounting for 63% credit movement last month.

The economic fallout from the coronavirus will be felt for years to come. The early data suggests commodity and consumer firms took the brunt of the hit in the first round of the crisis, while financials have emerged relatively unscathed. The long-term picture will become clearer as economies re-open and the ‘new normal’ for work and business takes shape.

The opinion indicator (figure 1) marks the most affected industries and sectors according to the April 2020 consensus credit data.

  • Financials are not yet been seriously affected, with improvements accounting for 63% of total movement last month, and deteriorations accounting for 37% of movement. Corporates, on the other hand, show a strong bias towards deterioration, at 82% of total credit movement.  
  • The most severely affected industry was oil and gas, with 92% of all credit movement for last month represented by deterioration. Geographically, US and Canadian firms came out worst, with a deteriorating bias of 96% and 97% respectively.
  • Other poorly performing industries include basic materials (87% deteriorating), consumer services (86% deteriorating) and telecommunications (85% deteriorating).
  • Of the reported sectors, travel and leisure saw the most net downgrades, at 94% of total movement.

The distribution changes (see figure 2) track the rate of credit category migration for industries and sectors according to the April 2020 consensus credit data.

  • The much-predicted ‘BBB cliff’ phenomenon began to take effect last month, with corporates bearing the brunt. For all corporates, the bbb category saw a drop of -0.47 percentage points (pp), while the bb category increased by 0.53pp and the c category by 0.34pp. For US corporates in particular, the bbb category reduced by -0.64pp, and the c category increased by 0.84pp. In the UK, -1.05pp of corporate firms dropped out of the bbb category, with most ending up in the bb category (+0.99pp).
  • US oil and gas saw a reduction in almost all credit categories, while the riskiest category, c, increased by 1.94pp.
  • Construction and materials also saw a sharp bbb cliff drop-off at -1.78pp, with the migration spread across bb and b at 1.24pp and 0.54pp respectively.
  • General retailers struggled last month, with -1.11pp fewer bbb entities, and a growth of 0.49pp bb entities and 0.51pp c entities.

The rate of entities migrating from investment grade to high yield according to the April 2020 consensus credit data is tracked in figure 3.

  • The worst affected sector was travel and leisure, with 15.2% of all investment-grade entities migrating to high-yield last month.
  • Consumer services also saw a high instance of companies flipping into non-investment grade territory, at 5.33%.
  • Health care, technology, telecommunications and utilities were left relatively unscathed, with no instances of companies dropping into high-yield (though each industry did experience deteriorations).


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