So far in 2020, there have been 30 fallen angels, or issuers downgraded to speculative grade ('BB+' or lower) from investment grade ('BBB-' or higher), with over $300 billion in rated debt (as of May 31). Four of the six additions to this tally in May were from the transportation sector, and three of these were airlines. Meanwhile, the number of potential fallen angels (issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications) reached a record high of 126 globally, from a high of 111 the previous month and nearly triple the total of 44 in January. This increase shows considerable room for more downgrades to speculative grade.

The broad trends in potential fallen angels have not changed since our last report, despite the increase in the tally (see "Potential Fallen Angels Hit A Record-High 111"). Among nonfinancial corporate issuers, the highest downgrade potential remains in the sectors most exposed to business disruptions from COVID-19-related social distancing measures, as well as oil and gas. The auto as well as leisure and lodging sectors show the most immediate downgrade potential, with the highest number of ratings on CreditWatch with negative implications. Financial institutions still have the highest count of potential fallen angels, reflecting exposure to their weakened clients, but most are on negative outlooks instead of CreditWatch negative. CreditWatch negative placements typically have a 50% likelihood of downgrade, whereas negative outlooks show a roughly 1 in 3 likelihood and over a longer time horizon.

At the same time, the count of potential rising stars (issuers rated 'BB+' with positive outlooks or ratings on CreditWatch with positive implications) fell to eight in May. Moreover, there has been just a single rising star since the COVID-19 pandemic began: FGL Holdings, which was upgraded on June 1 following the January upgrade of WellCare Health Plans. Note that the exhibits in this report are as of May 31, 2020; thus, subsequent rating actions will be addressed in future reports.

Lockdowns And Travel Restrictions Hit Transportation Hard

Six corporate issuers became fallen angels since our last report: British Airways PLC, International Consolidated Airlines Group S.A., Deutsche Lufthansa AG, Trinity Industries Inc., Multibank Inc. y Subsidiarias, and Rolls-Royce PLC. Of these, the first three are airline operators, while Trinity Industries Inc. provides rail transportation products and services. This raises the number of fallen angels in transportation to five, the sector's highest-ever tally. This increase led to an uptick in the sector's ratio of fallen angels to investment-grade issuers, but a higher number of issuers in the sector overall kept the ratio below peaks seen over the past 15 years.

The transportation sector has felt adverse pressure on revenue as measures to prevent the spread of the COVID-19 pandemic, including a halt in travel, social distancing measures, and many governments closing their borders, created consequences for the sector and many others.

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Financial Institutions And Lodging And Leisure Lead Potential Fallen Angels

Of the 19 additions to the potential fallen angels list since our last report, six are financial institutions, four are in capital goods, three are in transportation, and one each is in forest products and building materials, homebuilders and real estate, media and entertainment, retail and restaurants, utilities, and midstream.

Financial institutions continue to top the list of potential fallen angels, with 21. This is in line with risk trend adjustments made to S&P Global Ratings' Banking Industry Country Risk Assessment (BICRA) in recent months (see "Banking Industry Country Risk Assessment Update: May 2020"). One of those adjustments has been the U.S.'s economic risk trend, which was revised to negative from stable. Indeed, five of the six new financial additions to the list of potential fallen angels were U.S. financial services firms, including Ally Financial, CIT Bank N.A. (whose operating bank is rated 'BBB-' with a negative outlook), Discover Financial Services, and Synchrony Financial.

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On the bright side, only one potential fallen angel in the financial institutions sector is on CreditWatch negative, implying less immediate downgrade risk for this sector because the time horizon for negative outlooks is generally one to two years for investment-grade issuers, and presumably temporary dislocations in markets and the economy may improve, at least in part, by then. Moreover, the number of financial institutions on the list partly reflects the larger number of rated entities globally within that sector. Only 7% of the total number of investment-grade financial institutions are potential fallen angels.

By region, the U.S. holds the largest count and debt volume of potential fallen angels, with 58 issuers accounting for $300 billion in rated debt, followed by Europe with 30 issuers and $151 billion in rated debt. Asia-Pacific and Latin America are considerably smaller, with Asia-Pacific at 15 potential fallen angels with $21 billion in rated debt and Latin America at 15 issuers with $75 billion in rated debt.

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Beyond financial institutions, the lodging and leisure sector has also seen a surge in potential fallen angels, alongside a rise in negative bias (the proportion of issuers with negative outlooks or ratings on CreditWatch with negative implications) for investment-grade issuers in the sector. This has brought its largest subsector, media and entertainment, to an all-time high of 13 potential fallen angels. This also brings lodging and leisure close to the highest ratio of potential fallen angels to investment-grade issuers, at 25%. The only sector with a higher ratio is merchant power at 33%, but that accounts for just two out of only six investment-grade issuers. As mentioned in our last report, this trend for lodging and leisure reflects the declines in revenue caused by restrictions on travel and consumer activity over recent months.

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Lodging And Leisure Also Shows The Highest Immediate Fallen Angel Risk

Potential fallen angels on CreditWatch with negative implications carry a more immediate risk of downgrade--a timeline of 90 days, compared with one to two years for those with negative outlooks.

Last month, two issuers joined the list of potential fallen angels on CreditWatch with negative implications, bringing the total to 24. These were Norwegian property developer Samhallsbyggnadsbolaget i Norden AB, which was placed on CreditWatch with negative implications owing to uncertainties around the company's management (see "Swedish Property Company Samhallsbyggnadsbolaget i Norden 'BBB-' Rating On CreditWatch Negative After Governance Concern," May 8, 2020), and U.K.-based airline operator easyJet PLC, which was downgraded and placed on CreditWatch negative due to the impact of the coronavirus outbreak on the industry (see "Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative," May 20, 2020).

The share of these issuers among total potential fallen angels decreased to just under one-fifth in May, from close to one-quarter in April, due in part to the resolution of some previous CreditWatch placements (that is, issuer downgrades), as well as the fewer additions in May. Nonetheless, the ratio remains high relative to the experience of the past two years and bears watching for signs of reversing toward the recent peak.

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The sector distribution of potential fallen angels on CreditWatch negative did not change much from our last report. Lodging and leisure clearly led the pack with seven, five of which were in the U.S. The auto sector followed with four, while consumer products had three. Transportation saw all three of last month's CreditWatch negative placements resolved by downgrades, while there was only one addition (easyJet).

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The Gap Between Potential Fallen Angels And Potential Rising Stars Reaches A Record High

While potential fallen angels stand at a record high, potential rising stars fell to their lowest count since 1995 in May. Both records point to gloomy outlooks for ratings performance. Of the current potential rising stars, three are on CreditWatch with positive implications, whereas the remaining five are assigned positive outlooks. By region, the U.S. still contributes the most, with five out of eight potential rising stars, whereas by sector, the financial institutions sector leads with two issuers.

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The rising stars count this year through May 31 remained at one--U.S. insurance company WellCare Health Plans Inc.--and is far behind the fallen angels count at 30. At this point in 2019 and 2018, there were eight and 28 rising stars, respectively. The ratio of rising stars to total speculative-grade issuers declined further to 0.4% in May 2020, far below its 10-year average of 1.2%.

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Related Research

• Banking Industry Country Risk Assessment Update: May 2020, May 27, 2020
• Rolls-Royce PLC Downgraded To 'BB'; Outlook Negative, May 27, 2020
• Multibank Inc. Ratings Lowered To 'BB+/B' From 'BBB/A-2' On Acquisition By Banco De Bogota; Outlook Stable, May 26, 2020
• Trinity Industries Inc. Downgraded To 'BB+' From 'BBB-' On Lower Rail Volume; Outlook Stable, May 22, 2020
• Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative, May 20, 2020
• Potential Fallen Angels Hit A Record-High 111, May 14, 2020
• Swedish Property Company Samhallsbyggnadsbolaget i Norden 'BBB-' Rating On CreditWatch Negative After Governance Concern, May 8, 2020