Chart 1

S&P Global Ratings downgraded 539 global corporate issuers (financial and nonfinancial) and upgraded 242 through the third quarter of 2019. Downgrades have outpaced upgrades for years due in part to increasing leverage, encouraged by stubbornly low and, in some cases, negative interest rates amid loose central bank monetary policy. In fact, leverage across most nonfinancial sectors is the highest in the past 15 years, which was one of the factors leading to lower ratings through the current credit cycle.

All but four sectors currently show median ratings at the lowest levels in two decades--a sign of vulnerability as current benign credit conditions wane. These four sectors, among them insurance and utilities, remain resilient despite structural changes in the consumer landscape, high geopolitical risks (both foreign and domestic), trade tensions, and subsequently high capital market volatility. Both the increase in leverage and deterioration in median ratings reflect a trend of more aggressive financial policies among existing rated issuers as much as new, more leveraged, lower-rated issuers to market over the years. For more information, see "A Weakening Economic Outlook And High Leverage Raise Global Corporate Downgrade Prospects," published July 30, 2019.

Chart 2

While below historical averages, downgrade potential in the U.S., Europe, and emerging markets appears to have hit an inflection point in mid-2018, ticking up from record lows to present levels of 19%, 16%, and 18%, respectively, as measured by negative bias (the proportion of issuers with negative rating outlooks or ratings on CreditWatch with negative implications). Meanwhile, downgrade ratios (the proportion of downgrades among total rating actions) have risen above historical averages so far in 2019 in all regions but Europe.

We expect corporate issuers in the U.S., Europe, and emerging markets, especially in the auto, energy, and consumer/retail sectors, will see deteriorating credit quality in the next year, amid a presently neutral but weakening economic outlook and high nonfinancial corporate leverage. Note that S&P Global Ratings has taken negative rating actions on 10 auto companies since Sept. 30, 2019, reducing the sector's negative bias, though the sector continues to show relatively high downgrade prospects.

Table 1

The U.S. And Emerging Markets Have Weaker Rating Distributions

The U.S. and emerging markets have weaker rating distributions than other regions, with over half of issuers in both regions currently rated speculative grade ('BB+' or lower), compared with 43% for Europe and just 26% for the other developed markets (Australia, Canada, Japan, and New Zealand). This trend in the U.S. has accelerated in recent years with leveraged loans and other higher-yielding funding sources increasing, quenching investors' thirst for yield while accommodative monetary policies have suppressed the relative cost of capital for issuers. In emerging markets, the weaker ratings distribution reflects higher country risk and growing domestic and geopolitical risks in various economies throughout the world.

This distribution is particularly important because on average, roughly half of speculative-grade corporate issuers experience transitions (upgrades or downgrades) over a one-year time horizon, double the rate of their investment-grade (rated 'BBB-' or higher) counterparts. For more information, see "2018 Annual Global Corporate Default And Rating Transition Study," published April 9, 2019.

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Volatility in ratings (vis-à-vis upgrades and downgrades) typically increases at lower rating categories, while higher ratings are generally more stable. With median ratings in the speculative-grade rating category, corporate issuers in the U.S., emerging markets, and Latin America all have higher ratings volatility, while Europe, other developed markets, and Asia have higher median ratings and more ratings stability (see table 2). Over the past five years, declines in creditworthiness have been most pronounced in Latin America and Asia.

Table 2

The Auto, Energy, And Consumer Sectors Are Likely To Lead Downgrades In The Near Term

Downgrades in the consumer products and oil and gas sectors accounted for roughly a third of the downgrades in third-quarter 2019, and upgrades, while limited, were largely concentrated in the utility sector (with 20%).

S&P Global Ratings has taken 10 negative ratings actions in the auto industry since Sept. 30, and weakness is expected to continue as weaker auto sales, driven by competitive pressures in the aftermarket and firm-specific underperformance, likely compound the sector's current negative ratings bias. For more information, see our "Industry Top Trends 2019: Autos" and "U.S. Auto Sector Faces Bumpy Roads Ahead With Rising Recession Odds And Falling Demand," published Oct. 16, 2019.

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Table 3

Additional Exhibits

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Table 4

Table 5

Table 6

Table 7

Appendix

For the purpose of this report, we define the regions below as follows:

U.S.:  U.S., Bermuda, Cayman Islands

Europe:  Andorra, Austria, Belgium, Bulgaria, Cape Verde, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, Norway, Portugal, Romania, Saint Helena, Slovenia, Spain, Sweden, Switzerland, U.K.

Other developed:  Australia, Canada, Japan, New Zealand

Emerging markets consist of:

Asia:  Bangladesh, China, Cook Islands, Fiji, Hong Kong, India, Indonesia, South Korea, Malaysia, Marshall Islands, Mongolia, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam

Eastern Europe, Middle East, and Africa (EEMEA):  Bahrain, Botswana, Burkina Faso, Cameroon, Congo-Brazzaville, Croatia, Egypt, Georgia, Ghana, Iraq, Israel, Jordan, Kazakhstan, Kenya, Kuwait, Latvia, Lebanon, Liberia, Macedonia, Mauritius, Montenegro, Morocco, Mozambique, Nigeria, Oman, Qatar, Russia, Saudi Arabia, Senegal, Serbia, South Africa, Tunisia, Turkey, Ukraine, United Arab Emirates, Zambia, Bulgaria, Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania, Slovak Republic

Latin America:  Argentina, Aruba, Barbados, Belize, Bolivia, Brazil, British Virgin Islands, Chile, Colombia, Costa Rica, Curacao, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Montserrat, Netherland Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, Venezuela

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