The number of potential bond downgrades (issuers rated 'AAA' to 'B-' by S&P Global Ratings with either negative rating outlooks or ratings on CreditWatch with negative implications) rose sharply to a 10-year high of 860 on March 25 from 649 as of Feb. 28. The tally has steadily risen for 10 consecutive months, but the combination of COVID-19 and a sharp decline in oil prices contributed to an abrupt increase in the tally last month.

In March, we removed 55 issuers from the list of potential downgrades and added 266--of those, a total of 218 have ratings that are exposed to risks stemming from COVID-19. This brings the count of potential bond downgrades facing direct or indirect effects from the COVID-19 fallout to 277, roughly one-third of total potential downgrades.

Governments across the globe have enforced social distancing measures, including travel restrictions and lockdowns, necessary to contain the spread of infections. These restrictions continue to affect tourism and travel (see "Various Ratings Actions Taken On 34 Companies In The Lodging And Leisure Sector," March 21, 2020) and demand for consumer discretionary products and eating out (see "Coronavirus Dramatically Increases Risk For Already Stressed Retail And Restaurant Sectors," March 20, 2020).

This is reflected in the addition of 86 potential downgrades from the media and entertainment sector (see chart 1). In the initial phase of the coronavirus outbreak, the impact on firms outside of China was mostly through supply chains. But with the rapid spread in Europe and the U.S., firms there are suffering from the impact of containment measures on domestic consumption (see chart 2). Depending on how long confinement measures remain in place, economic recovery is unlikely to start before the end of the second quarter.

Chart 1

Chart 2

Credit Deterioration Continues In 2020 With High Downgrades

• This month, we added 266 issuers to our list of potential downgrades, and we removed 55, 44 of which were downgraded with or without a change in rating outlook or CreditWatch status.
• Downgrades in the first quarter totaled 492, 65% of last year's total of 753. The media and entertainment sector leads with 67 downgrades in 2020.
• In March, 83 issuers from our list of potential bond downgrades were downgraded, 39 of which remain on the list. Media and entertainment led downgrades with 27, followed by retail and restaurants and consumer products with seven downgrades each. About two-thirds of these downgrades are from the U.S.
• The media and entertainment sector is particularly exposed--at 50%, its negative bias is above its historical average (see chart 3), and its median rating is 'B' (see chart 6).

Chart 3

Highly Leveraged And Aggressive Risk Profiles Make Issuers More Vulnerable To The Impact From COVID-19

Lower revenues due to COVID-19 as well as the collapse of oil prices are risk factors for the ratings on corporate issuers. Social distancing measures across the globe affect companies through various channels: interrupted supply chains, weak demand as containment weighs on consumption, and closing of firms and plants as a security measure as well as mandatory lockdowns in many jurisdictions. We expect this to translate into widening financial risk, especially for companies operating in media and entertainment--we see 71% of the issuers in this sector facing aggressive or higher financial risk (see chart 4).

Chart 4

Casinos, Gambling, And Tourism Drive Downgrade Potential In Media And Entertainment

Casinos, gambling, and tourism-related businesses face the highest share of downgrade potential in media and entertainment (see chart 5). Among the 86 media and entertainment issuers added to the potential downgrades list, the subsectors that account for the most are:

• 25 in the casinos and gambling business;
• 18 in tourism, like hotels, resorts, and cruise lines;
• 12 in movies and entertainment business; and
• Eight from leisure facilities.

However, the entire media and entertainment sector is not going through a rough phase--there are issuers engaged in data publishing (like Refinitiv), advertising, and internet-based services (including Netflix and Twitter) that are fairly stable. Social distancing exacerbated weaknesses in subsectors that were already vulnerable to downgrade potential before the COVID-19 outbreak (see "Leisure, Media, And Consumer Products Have The Highest Downgrade Potential," Feb. 4, 2020).

Chart 5

With this sudden jump in potential bond downgrades, and despite the addition of five potential bond upgrades in March--four in the U.S. and one in Europe--the gap between the potential bond downgrades and potential bond upgrades has widened. It now matches the 2009 global financial crisis levels. The current environment is similar to 2009 in that dynamic and extremely volatile conditions are affecting policy, economic fundamentals, and the capital markets at large.

Given the particular complexity of a pandemic-driven economic and capital markets dislocation, if the current situation lasts for a prolonged period, then it would have adverse effects on issuers, starting from the low-rated ones. However, if contained, the risks of the demand and supply shocks to the issuers will wear off soon, though they would partially shave off profits and revenues for the affected issuers.

Chart 6

Table 1

Table 2

Related Research

• Various Ratings Actions Taken On 34 Companies In The Lodging and Leisure Sector, March 21, 2020
• Coronavirus Dramatically Increases Risk For Already Stressed Retail And Restaurant Sectors, March 20, 2020
• Leisure, Media, And Consumer Products Have The Highest Downgrade Potential, Feb. 4, 2020