COVID-19 Recovery & Current Credit Conditions

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Credit trends are improving rapidly, albeit with significant differences across regions and sectors. The primary positive drivers remain intact: rebounding economies, vaccination progress, plentiful liquidity, and a strong appetite for risk even at the weakest end of the credit spectrum. S&P Global Ratings has revised their 2021 global GDP growth forecast up to 5.9% and see upside risks. Crucially, the U.S. and China—which account for almost 40% of the global economy—are both growing rapidly.

S&P Global Ratings expects China’s GDP to grow 8.3% this year, and for the U.S. economy to expand 6.7%, in the biggest jump since 1984. A rapid vaccine rollout in the U.S. has made for a rapid easing of social restrictions, allowing social and economic activity to normalize and reinforcing massive government stimulus programs. Emerging markets, however, remain a concern given that it could take another year to achieve widespread vaccination in those countries. Vaccine-resistant variants remain the primary risk to global normalization, given their potential to undermine even the most successful rollouts and potentially force the reimposition of restrictions.

Reflecting these positive factors, there have been three times as many upgrades as downgrades this year (see chart 1). That said, these upgrades remain a fraction of the total 2020 downgrades triggered by the pandemic and the collapse in oil prices. Companies at the lower end of the scale, in the ‘B’ and ‘CCC’ categories, have accounted for the majority of upgrades (see chart 2). Many of these more vulnerable issuers, which represented the bulk of last year’s downgrades, are benefitting from favorable financing conditions and a better-than-expected economic recovery. Media and entertainment, consumer products, retail and restaurant, and technology are among the sectors that have seen the largest number of upgrades—on the back of the economic rebound, easing of social restrictions, and pick-up in oil prices (see chart 3).

European companies' ability to repay their COVID-19 loans is at risk as they face delayed payments on invoices, according to market participants.

Companies across Europe saw a sharp increase in the number of suppliers delaying payments over the course of the pandemic, according to trade credit balance data from S&P Global Market Intelligence and CreditSafe. As of April, these delayed payments were still far more commonplace than they were before the COVID-19 crisis.

"Depending on the size of the amount owed by the customer, and the scale of the delay in paying the invoice, late payment could well affect a company's ability to pay their COVID-19 loans back — or pay in full without having to defer payment of another debt," said Colin Haig, president of U.K. insolvency and restructuring industry body R3.

Coronavirus Coverage In Europe, the Middle East, and Africa, the effects of the second wave of COVID-19 are proving to be more severe than initially expected. The recovery will largely hinge on the ultimate success of vaccine rollouts and easing of lockdown restrictions.

S&P Global Ratings has increased their 2021 GDP growth projections for most major emerging markets (EM), as the economic impact of pandemic-related restrictions becomes less severe. GDP data for Q1 is clear evidence of this trend, surprising to the upside in several EMs, mainly due to stronger-than-expected domestic demand, and in many cases, activity in services, even as new daily COVID-19 cases reached new record highs at that time in some countries.

However, the risks to our economic outlook for EMs are skewed to the downside and have risen in recent weeks as a new COVID-19 wave takes hold in several countries, mostly due to the Delta variant. In some EMs, new daily virus cases have reached new highs, prompting some governments to reimpose lockdown measures. Even if the impact of lockdowns on activity has lessened, the on-and-off measures act as a drag on the economic recovery. In the absence of a faster vaccination pace, the exit from the pandemic-related downturn could be delayed for several EMs.

The outlook for the global economy is brightening. As levels of vaccinations and activity vary across regions that need to pull out of the pandemic together, estimates for when the global economy will recover range from Q2 to the end of 2021.

S&P Global Market Intelligence leveraged the PD Model Market Signals (PDMS) for a point-in-time view of credit risk in Latin America.

This model provides early warning signals of potential default. In the corporates space, S&P Global Market Intelligence looked to see which industries were most and least likely to be impacted over the period January 2020 through February 2021. Overall, there was a large spike in the probability of default for the Consumer Discretionary segment during during March-April 2020. This spike was closely followed by the Financials segment, which started to tick up in March before peaking in May 2020. However, probability of default scores dropped across all segments starting around July 2020, and have remained fairly stable since then.

The divide between companies and industries that benefited from the crisis and suffered from structural shifts will widen as the U.S.’s approach to work and leisure further evolves. In LatAm, the recovery has been uneven across countries and sectors.

U.S. investment-grade corporate bond sales are on track for a near-record year, as companies look to lock in low-cost funding before the expected easing of Federal Reserve support.

Issuers such as Amazon.com Inc. and Verizon Communications Inc. sold $774.94 billion of bonds in the first half, a total only surpassed by last year's coronavirus debt deluge, according to data from LCD. M&A-related issuance surged 50% over the same period in 2020 to $115.48 billion. LCD has tracked investment-grade issuance since 2009.

Sales may also be comparatively busy in the second half of the year, as borrowers will likely want to raise funds for refinancing and near-record levels of M&A before the Fed starts to step back from bond buying. Treasury yields have already crept up from their 2020 lows as a rebounding economy and waning pandemic weaken the argument for central-bank support.

– Changing Dynamics of the U.S. Jobs Market