Using Credit Ratings Research to Filter Important Signals from Noise in News Headlines

In the past few years, macroeconomic factors have dominated the news headlines. This includes inflation, the COVID-19 pandemic, supply chain issues, geopolitics and, lately, climate change and natural gas disruptions in Europe. How can we find an objective metric to zero in on the themes that matter most from a credit risk perspective and track the importance of these themes over time?

In this blog, we break this problem into two broader questions:

How can we sift out important trends from noise?

When is a news headline critical enough to potentially affect systemic credit risk?

How can we objectively measure the strengthening and weakening of these trends?

Breaking news headlines tend to have a relatively short shelf life and quickly drop off the radar screen, even though the implied credit risk trends can still persist.

Our Approach

To tackle these two questions, we begin by deriving quantitative indicators using text analysis of abstracts in ratings research reports. Ratings research is interesting because of several attributes:

• Ratings research articles address frequently asked questions by the investor community in response to news headlines, after digesting this information and considering their credit risk impact. While credit ratings research is not the timeliest source of breaking news, there is potential to use this information to confirm the importance of individual news headlines.
• S&P Global Ratings’ articles are published in a structured format. This enables us to skip irrelevant sections in an article and then group comparable article sections and aggregate them across geographies and industries.  
• The RatingsXpress Research on Xpressfeed database buckets sections as fields in a relational database, which makes it easy to extract the appropriate section text without having to parse XML files.
• The abstracts section, in particular, serves as an executive summary and excludes words that relate to ratings criteria that routinely appear in reports.

We can count the number of abstracts from S&P Global Ratings’ research that mention certain key themes across geographic regions. In this example, we quantify the number of mentions of words relating to:

• War (physical, trade war or other types of conflict)
• Pandemic
• Inflation
• Supply chain disruptions
• Climate change

Using a three-month moving average, we can smooth the effects of analysts responding to the same theme over different timeframes, while still being sensitive to flag changes (i.e., a rise or fall) in the trend lines.

Chart 1: Percentage of S&P Global Ratings’ research commentaries with specific keywords in the abstract, from January 2018 to June 2022

Source: RatingsXpress Research on Xpressfeed. Trends extracted from 4,505 abstracts of S&P Global Ratings articles published from January  2018 to June 2022. For illustrative purposes only. For more information, see S&P Global’s Textural Data Suite.

Several observations

• War, trade war and other conflicts have been casting a shadow globally since the start of our sample period, rising in importance in the weeks leading up to Russia’s invasion of the Ukraine.
• Supply chain issues existed pre-COVID, but rose in the past year starting in August 2021.
• COVID-19 became a dominant theme starting in early 2020 after the first outbreak in late 2019, but then dampened throughout 2020.
• Climate change has been mentioned less frequently, but remains on our radar screen. 

Regional Comparisons of Credit Themes (January to June 2022)

Looking at cross-sectional regional comparisons, we find that inflation and supply chain issues are relatively more dominant in the U.S. and Canada than the pandemic and wars. Asia Pacific is the only region where COVID-19 remained as the most important theme in the last few months. 

Chart 2: Percentage S&P Global Ratings’ research commentaries with specific keywords in the abstract by geographic region, for the period April to June 2022

Source:  RatingsXpress Research on Xpressfeed. Keywords extracted from 236 abstracts of S&P Global Ratings articles published from April to June 2022. For illustrative purposes only. For more information, see S&P Global’s Textural Data Suite. 

Regional Comparisons on Word Clouds from Full Analysis and Summary Analysis articles

We now broaden the search of credit risk themes to include all credit risk descriptive words by looking at a cross-regional word clouds from Full Analysis, Summary Analysis articles.  We analyze credit highlights, base case scenario, upside scenario, downside scenario and outlook.

Sovereign support and government are key to credit risk analysis for entities in Asia, Latin America and emerging markets (green font). In the U.S. and Canada, however, leverage is the most dominant theme.

Chart 3: Top 5 word count comparisons across regions

Source: RatingsXpress Research on Xpressfeed.  Keywords extracted from 61,664 S&P Global Ratings Research Update, Full Analysis and Summary Analysis articles published from January 2018 to July 2022. Sections extracted include Credit Highlights, Outlook, Base Case scenario, Upside Scenario and Downside Scenario. For illustrative purposes only. For more information, see S&P Global’s Textural Data Suite. 

Drilling Down into Leverage and Inflation in the U.S.

We extract Financial Risk Profile scores from RatingsXpress’ Scores and Factors database to further investigate the potential theme of leverage in the U.S. The scores combine assessments of a variety of credit ratios, predominately cash flow-based, which complement each other by focusing attention on the different levels of a company's cash flow waterfall in relation to its obligations. This results in a range of Financial Risk Profile scores: 1, minimal; 2, modest; 3, intermediate; 4, significant; 5, aggressive; and 6, highly leveraged.^[1]

Close to 40% of the rated corporates and infrastructure entities in the U.S. have the weakest Financial Risk Profiles (i.e., 6, highly leveraged), which reflect weaker ability to fund interest-bearing obligations in the future, should there be further increases in interest costs to tame inflation.

Chart 4: Distribution of Financial Risk Profile scores for S&P Global Ratings’ rated corporates and infrastructure entities in the U.S.

Source: RatingsXpress®. Database of 2,139 records of scores and factors via Xpressfeed. As of August 15, 2022.  For illustrative purposes only.

Conclusion

In this blog, we discuss the use of credit risk research to confirm the importance of individual news headlines on credit risk.  We consider a quantitative measure on credit risk research to capture trends in credit risk themes over time and made comparisons across regions. We then used text analysis to compare what are key credit drivers by geographic region. Finally, we drilled down into scores and factors in a particular region to look at how resilient entities were to one of the drivers (i.e., inflation and interest rate hikes). This approach can be replicated for sector and industry aggregates to focus on important credit risks themes from news headlines.

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