While investment-grade issuers typically are able to withstand considerably more macro and event-driven stress than their speculative-grade counterparts, the COVID-19 pandemic and oil price shocks have resulted in a marked increase in fallen angels. Fallen angels are issuers with outstanding debt that have been downgraded to speculative grade ('BB+' and lower) from investment grade ('BBB-' and higher).

An effective shutdown in demand due to necessary social distancing protocols caused both a global recession as well as significant revenue and cash-flow pressure for many issuers across the credit spectrum.

The 2020 tally of fallen angels soared to 23 as of April 13 from only two at the end of January (see "Fallen Angel Risk Emerges For The European Auto Sector," Feb. 20, 2020). Global fallen angels are now at their highest level since 2015 (see chart 1). Moreover, three oil and gas companies in 2020 got there via multinotch downgrades due to the direct hit to their revenues stemming from the Saudi-Russia oil price war.

Chart 1

At the same time, the count of potential fallen angels (issuers rated 'BBB-' by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications) has followed suit. It reached 96 (surpassing 82 in March 2009), with the oil and gas sector seeing 10 new potential fallen angels since our last report.

Oil And Gas Led Realized And Potential Fallen Angels In March Amid Increasing Supply-Demand Imbalances

The oil and gas sector has come under intense pressure as supply and demand shocks occurred simultaneously, leading to a marked decline in oil prices. Following the failure of the OPEC+ meetings on March 6, oil prices plummeted as OPEC decided to increase its maximum production rate and not extend the existing production cuts past March 31, effectively waging an all-out price war with Russia.

This came in the context of the COVID-19 pandemic pressuring many industries in and outside the sector through a halt in demand. Industrial activity in big oil-consuming countries slowed due to social distancing, as health and safety concerns for workers have slowed labor inputs and weakened demand slowed industrial output. Travel restrictions have also resulted in a drag on demand for jet fuel, which typically accounts for about 8%-10% of global oil supply (see "Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions," March 9, 2020). Moreover, these challenges will likely persist despite the more recent OPEC+ deal that promises production cuts by major oil-producing nations.

This has translated into companies from the oil and gas sector leading both fallen angels (four) and new potential fallen angels (10) in March. Fallen angels in this sector account for about 0.7% of investment-grade issuers, now slightly above its historical average (see chart 2).

Chart 2

More broadly, fallen angels totaled 11 in March (all in the week of March 21-27)--tied with February 2016 for the highest monthly tally (see table 1). Five more were added to the list in the first two weeks of April.

These followed an extreme flight to quality, with substantial and accelerated widening of credit spreads and little interest in risk-taking in the speculative-grade or lower end of the investment-grade markets. Fortunately, the extension of the U.S. Federal Reserve's corporate bond-buying program to include fallen angels that were still rated investment grade as of March 21 eased the market impact of these actions somewhat, with spreads in the secondary market for both investment grade and speculative grade easing off record highs in late March.

So far in 2020, the midstream and refining sector (utilities) leads with the highest number of fallen angels, at seven, followed closely by upstream oil and gas with four and retail and restaurants with three. Some notable fallen angels include Ford Motor Co., Delta Air Lines Inc., Occidental Petroleum Corp., Marks & Spencer, and Esselunga SpA. Among these, Ford has the highest affected debt volume ($113.8 billion), the highest outstanding debt volume for a fallen angel on record since the company appeared on our list in 2005.

Most recently, Renault S.A. was downgraded to 'BB+' from 'BBB-', on the expectation that the global pandemic could further weigh on earnings and cash flow following an already challenging 2019 (see "French Automaker Renault Downgraded To ‘BB+/B’ On Weaker Metrics Due To COVID-19; Outlook Negative," April 9, 2020).

Social Distancing Makes Retail And Restaurant A Major Contributor To Fallen Angels

Credit risks in the global retail sector sharpened as efforts to contain the coronavirus led to store closures and changes to shopping habits, like shopping being limited to essentials or online purchases. The ultimate impact will depend on the duration of shutdowns (see "Coronavirus Dramatically Increases Risk For Already Stressed Retail And Restaurant Sectors," March 20, 2020). As of April 13, this had led to three fallen angels, and five new potential fallen angels.

A notable example is British retailer Marks & Spencer that became a fallen angel on March 26 as a consequence of COVID-19-related restrictions and social distancing measures. Such measures will materially reduce sales in its clothing and home division, only partially mitigated by online sales and the anticipated resilience of the food segment (see "Marks & Spencer Downgraded To 'BB+'; On Watch Negative On Decline In Nonfood Sales Amid COVID-19 Uncertainties," March 26, 2020.)

As such, fallen angels in this group have shot up to 0.6% of the sector's investment-grade issuers, now approaching its historical average (see chart 3).

Chart 3

More Downgrades Are Likely To Come

Globally, fallen angels as a ratio to total investment-grade issuers is fast rising to its 10-year average (see chart 4). This ratio could still increase substantially. The share of investment-grade issuers with a negative bias has surged, while the list of potential fallen angels has grown substantially as well, especially in sectors that have seen revenue pressure due to social distancing and the abrupt shutdown of travel (see chart 5 and table 2). In March alone, 43 names were added to potential fallen angels, with 20 more in the first two weeks of April, bringing the total as of April 13 to 96 issuers--the highest count since the financial crisis--versus 44 as of the end of January.

The largest increase in potential fallen angels has come from media and entertainment, most of them in lodging and leisure where restrictions on travel and consumer activity are causing significant declines in revenue. We expect revenue per available room (RevPAR) to decline 5%-10% in the U.S., 10%-20% in Europe, and more than 20% in Asia ("Various Ratings Actions Taken On 34 Companies In The Lodging And Leisure Sector," March 21, 2020). We added 10 oil and gas issuers to the list, with seven of those based in the U.S. Due to the severe supply-demand imbalance in second-quarter 2020, we believe this trend is likely to continue.

Notable names among potential fallen angels include include Hyatt Hotels Corp., Las Vegas Sands Corp., and British Airways PLC.

Chart 4

Chart 5

Chart 6

Table 1

Table 2

Table 3

Related Research

• French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative, April 9, 2020
• Marks & Spencer Downgraded to 'BB+'; On Watch Negative On Decline In Nonfood Sales Amid COVID-19 Uncertainties, March 26, 2020
• 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
• Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions, March 9, 2020
• Fallen Angel Risk Emerges For The European Auto Sector, Feb. 20, 2020