Credit Markets & Coronavirus

A global recession presages a spike in default rates. In our view, it seems likely that the sudden stop to the global economy caused by COVID-19--and the drastic efforts to contain it--will lead to a global recession. Combined with the collapse in oil prices and extreme volatility in capital markets, this will inevitably have severe implications for credit markets. In S&P Global Ratings' view, this will likely mean a surge in defaults, potentially reaching a double-digit speculative-grade default rate for nonfinancial corporates in the U.S. and a material increase to high single digits in Europe over the next six to 12 months.

Collapsing demand threatens a cash flow slump. Central banks will likely prevent systemic failures in the financial system by cutting rates to zero or lower, injecting liquidity into the system, and implementing measures similar to those after the global financial crisis to lessen risk.

Since our last update, which was on March 3, the spread of the coronavirus has accelerated, and its economic effect has worsened sharply. Economic data remains scarce, but the long-awaited initial figures from China for January and February were much worse than feared. The spread of the virus, which the World Health Organization declared to be a pandemic on March 11, appears to be stabilizing in much of Asia. However, the increasing restrictions on person-to-person contact in Europe and the U.S. have sent markets reeling as risk-aversion rises and views on economic activity, earnings, and credit quality deteriorate sharply. As a result, we now forecast a global recession this year, with annual GDP rising 1%-1.5%.

The COVID-19 pandemic looks set to far surpass the infection rate of any other epidemic in living memory, and well over a 100 countries are now infected. World Health Organization officials have declared that Europe is now the epicenter of the pandemic, reflecting its rapid spread globally. The ramifications for economies worldwide are now material, with a considerable likelihood of a global recession.

Real estate took a major hit this week as growing coronavirus concerns metastasized into market panic, which was then fueled by President Donald Trump's ban on travel from Europe.

The toll on real estate investment trusts was a little lighter than on the broader stock market, and it remains the second-best-performing sector year-to-date of the 11 in the Global Industry Classification Standard, according to S&P Global Market Intelligence data. Year-to-date through March 12, the SNL U.S. REIT Equity index fell 20.5%, while the S&P 500 dropped 23.2%

Utility stocks have weathered the market selloff better than many others, but the broad coronavirus-induced collapse in equity prices could carry some consequences for the sector, according to UBS analysts.

Customer growth and capital spending drive earnings for the utilities sector, along with regulator-determined return on equity and a company's capital structure, the bank's analysts said. It is the last metric, the companies' use of debt and equity to finance growth projects and operations, that could raise concerns for some gas utilities and make certain stocks in the space more attractive than others, in UBS's view.

The credit ratings on Korean companies were already squeezed before COVID-19 shuttered cities and toppled supply chains, and matters are deteriorating quickly. The World Health Organization on March 11, 2020, defined the outbreak as a pandemic, noting there were 118,000 infections in 114 countries. Korea is unusually exposed. It is a coronavirus hotspot and its companies are highly dependent on global trade. S&P Global Ratings has a negative outlook on almost one-quarter of the Korean companies we rate, and we expect COVID-19 will have far-reaching ratings implications for Korean firms.