The count of fallen angels (issuers downgraded to speculative grade from investment grade) increased by six in July to a total of 40 this year so far, representing $340 billion in rated debt. The six new fallen angels since our last report are:

• Brazil-based thermoplastic resin manufacturer Braskem S.A.,
• U.A.E.-based real estate companies DIFC Investments Ltd.,
• Emaar Properties PJSC,
• China-based mining company Zijin Mining Group Co. Ltd.,
• German automotive systems manufacturer IHO Verwaltungs GmbH, and
• French automotive systems manufacturer Valeo S.A.

As a result, we've removed these issuers from the list of potential fallen angels. (Potential fallen angels are issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications.) In addition, we've added three issuers to the list and removed another three, bringing the tally to 120, below its record high of 126 in May and June. Of the other three removals:

• Argo Group U.S. Inc. was removed because its parent entered the list and now gets counted as a potential fallen angel (see "Argo Group International Holdings Ltd. Assigned 'BBB-' Rating; Series A Fixed-Rate Reset Preferred Shares Rated 'BB'"),
• Metso Corp. was removed as its rating was withdrawn, and
• Noble Energy Inc. was placed on CreditWatch with positive implications.

Chart 1

The tally of fallen angels compared with the total rated investment-grade issuers continued to rise in July, reaching 2.5% from just 1.0% in January. This is significantly above the 10-year average. In contrast, the number of rising stars (issuers upgraded to investment grade from speculative grade) remained at two. There was also only one addition to the list of potential rising stars (issuers rated 'BB+' with positive outlooks or ratings on CreditWatch positive), bringing the total to nine. As such, 2020 is still on track to set a record low for the number of rising stars (see chart 2).

Chart 2

With Two Additions This Month, The Auto Sector Joins Transportation To Lead Fallen Angels

The sector distribution of fallen angels through 2020 continues to show the broad-based hit to the economy from COVID-19 and the oil price crisis (see chart 3). Due to plummeting auto sales, notably in Europe, where the sector was already ailing previous to the spread of the virus, two more European auto issuers lost their investment-grade status in July. The real estate sector also had two new fallen angels in July, both from the United Arab Emirates, where the COVD-19 pandemic appears to have exacerbated supply-demand imbalances in real estate. Furthermore, as a result of the crisis, the government of Dubai might have less ability to provide fiscal support to its related entities (see "Three Dubai-Based Real Estate Companies Downgraded On Increased Economic Pressures Stemming From Spread Of COVID-19").

Chart 3

The Decline In Potential Fallen Angels Points To Gradual Stabilization

The count of potential fallen angels dropped to 120 in July, breaking the trend of increases over the past six months (see chart 4). However, the tally remains far above its long-term average.

Chart 4

Short-Term Risk Declines While Long-Term Risk Continues To Loom

In addition to the declining number of potential fallen angels, the proportion of potential fallen angels on CreditWatch with negative implications fell to 13% from 16% last month, and it's now half of its five-year high of 27% in April (see chart 5). This smaller proportion points to a less immediate credit risk and, potentially, a slower pace of new fallen angels in the near term. The timeline of a potential downgrade is 90 days for a negative CreditWatch, compared with six to 24 months for a negative outlook (see "Guide To Credit Rating Essentials, What Are They And How Do They Work?").

Chart 5

Leisure And Lodging Continues To Have The Highest Immediate Credit Risk

Consistent with the trends highlighted in our previous publications, financial institutions continue to lead the count of potential fallen angels, with 21, though these are a fairly small portion of all rated financial institutions globally. Additionally, only 5% of these have ratings on CreditWatch negative, compared with 13% for all sectors. Two of the three additions from our last report were financial institutions, Peru-based Intercorp Financial Services Inc. and New York-based Argo Group International Holdings Ltd. The other was Japanese auto manufacturer Nissan Motor Co. Ltd. All new additions have negative rating outlooks.

Media and entertainment, particularly lodging and leisure, remains the sector with the highest share of potential fallen angels on CreditWatch negative--43% out of 14 entities on the list. Moreover, 63% of potential fallen angels' debt value in media and entertainment is on CreditWatch negative, compared with 10.5% for the full list of potential fallen angels. Despite the high immediate credit risk, the sector has seen only two new fallen angels this year, neither of which was added in July.

Chart 6

Chart 7

Rising Stars And Potential Rising Stars Could See Record Lows This Year

There were no additions to the list of rising stars in July, keeping the total count for 2020 at two. Moreover, there was only one addition to potential rising stars, bringing the total to nine. At this pace, both rising stars and potential rising stars are on track to have a record-low tally this year. That leads to a much wider gap between potential fallen angels and rising stars than during the 2008-2009 financial crisis.

Table 1

Table 2

Table 3

Table 4

Table 5

Related Research

• Guide To Credit Rating Essentials, What Are They And How Do They Work?, In Understanding Credit Ratings, spglobal.com
• COVID-19 Persists, Increasing Downside Risks In Emerging Markets, Says Report, Aug. 5, 2020
• French Auto Supplier Valeo Downgraded To 'BB+' On Weak Deleveraging Post-COVID-19; Stable Outlook, July 31, 2020
• Auto And Industrial Supplier Schaeffler AG Downgraded To 'BB+' On Weaker Credit Metrics From COVID-19; Off Watch, July 20, 2020
• Braskem Netherlands Finance's Proposed Subordinated Loans Rated 'B+' And Assessed As Intermediate Equity Content, July 14, 2020
• Three Dubai-Based Real Estate Companies Downgraded On Increased Economic Pressures Stemming From Spread Of COVID-19, July 9, 2020