Key Takeaways
- In June, 300 environmental, social, and governance (ESG)-related rating and outlook changes occurred due directly to COVID-19 and health and safety effects, bringing the total to almost 1,500 over April-June.
- Sovereigns remain one of the most affected, with 20% of ratings affected by COVID-19, with governance factors also influencing rating or outlook changes.
- U.S. public finance saw continued downgrade activity in June, including multiple notches for entities affected by a severe drop in hospitality taxes (local governments), cancelled social events (student accommodations and conference centers), and some universities' decisions on remote learning, together with greater pressure on the not-for-profit transport sector (notably airports).
- Downgrade activity slowed in corporates and infrastructure to 48 in June, down from 220 over April-May, as we considered early on that sectors such as air travel, hotels, restaurants, and leisure would be severely disrupted for a prolonged period.
- Structured finance downgrades rose (45 in June), as did CreditWatch placements (up 137), notably for transactions driven by commercial sectors such as commercial mortgage-backed securities (CMBS) with hotel and retail exposure, and whole business securitizations including pubs, fast-food restaurants, and gyms.
Table 1
| ESG-Related Rating Actions* April-June 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Downgrade | CreditWatch negative | Outlook revision (downward) | Total number of ESG-related rating actions | % of ratings impacted by ESG | ||||||||||||||||
| June | April-June | June | April-June | June | April-June | June | April-June | April-June | ||||||||||||
| Sovereigns | 2 | 9 | 0 | 0 | 5 | 29 | 7 | 38 | 20 | |||||||||||
| International Public Finance | 2 | 5 | 0 | 0 | 7 | 34 | 9 | 39 | 12 | |||||||||||
| US Public Finance | 21 | 45 | 0 | 13 | 5 | 474 | 26 | 532 | 3 | |||||||||||
| Corporates & Infrastructure | 48 | 268 | 4 | 43 | 20 | 133 | 76 | 448 | 13 | |||||||||||
| Structured Finance | 45 | 61 | 137 | 376 | 0 | 0 | 182 | 437 | 1 | |||||||||||
| *Issuer-related actions on global scale ratings, except for structured finance, where numbers represent issue-level actions. The table does not show financial services because we consider the impact of lockdowns and social distancing on financial services ratings to be indirect rather than direct. Note: The table also includes four positive rating actions (two outlook revisions, two upgrades) resulting from increased demand for non-discretionary/food products, recreational vehicles, or reflecting the increased consumption of household sanitization and personal care products, all directly linked to the COVID-19 pandemic and social distancing requirements. | ||||||||||||||||||||
Chart 1
Not surprisingly, the bulk of ESG-related rating actions in June continued to stem from the COVID-19 pandemic, though there were a number related to governance factors. There have been some signs of business restoration in parts of the U.S., as well as in other countries that experienced a COVID surge earlier in the year and where the number of new cases is now tapering off. In contrast, cases have surged in densely populated U.S. states including Florida, California, and Texas, as well as in Mexico, Brazil, Spain, France, and India. This may limit the pace of recovery in 2020 and into 2021, although we currently do not assume further countrywide lockdowns like in April and May in Europe. Rating activity will likely remain elevated in the coming months as we resolve prior CreditWatch placements or update them for new developments. The sectors that are most exposed, in our view, remain leisure, hotels and restaurants, transportation, and governments, especially if there's a resurgence.
At the same time, vaccine developments could accelerate, with production already starting in some cases on the basis of governmental pre-orders, ahead of phase 3 testing results and regulatory approvals. Some experts believe that extensive clinical trial data could be put before regulators by the end of this year. It's estimated that it costs about $2 billion to bring a vaccine to market; GlaxoSmithKline said it had spent about that to develop the avian H5N1 flu vaccine, which it was able to make available in a little over 12 months. The U.S. recently announced a US$2 billion deal with Pfizer and German biotech firm BioNTech for 100 million doses. Other agreements are a $1.6 billion deal with Novavax for 100 million vaccines, or an even lower cost of $1.2 billion for 300 million vaccines with Astrazeneca in cooperation with Oxford University. Most leading vaccine candidates will require more than one dose, with approximately four weeks between doses, meaning that the number of people vaccinated will likely be around half of the number of doses. It implies that under the Pfizer example, patients would have to pay around $20 for each of the two vaccines.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic. As the situation evolves, we will update our assumptions and estimates accordingly.
Chart 2
What Does Pharma's Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?
A successful vaccine could improve the pharma industry's reputation and lead to a more balanced debate about U.S. drug price reform. Notwithstanding certain risks, the economic and societal benefit of a COVID-19 vaccine would be enormous. This could improve the industry's reputation and beyond the direct benefit of saving people's lives, include some indirect benefits. Communities could go back to normal, economies could recover more quickly, and jobs would be created.
We assume that the public and governments expect that a vaccine would be affordable. Governments are providing funding for the vaccine, and to reach herd immunity the majority of the population needs to be vaccinated. Even if a vaccine is affordable, treatments for COVID-19 may carry a level of profit that seems high to the public. When Gilead Science Inc. announced its price for Remdesivir in developed countries, this drew some criticism for the company and industry. We assume that vaccines would be priced responsibly and the profits invested in research and building manufacturing capacity rather than distributed to shareholders. As important as the cost will also be safety risks like unexpected immune side effects. Some pharma players are trying to negotiate with governments cost-based pricing on the condition that the government assumes any safety risks (which they are strongly resisting).
In the U.S., an important market for many pharmaceutical companies in terms of profitability, rising drug prices remain a key issue affecting the industry's social license to operate, and politicians are still using drug reform as a key platform, especially in light of the upcoming presidential election. Despite the potential positives from a reputational standpoint, we are skeptical that the pharmaceutical industry's race and collaboration with governments to manufacture a vaccine will slow the pace of drug reform efforts. However, the industry's involvement in vaccine development highlights the role it plays in public health and the need for an environment that supports investment in innovation. We believe this reduces the probability of more dramatic pricing reforms.
Accessibility is as much a strategic as an ethical question, and governments will have to become more active stakeholders in infectious disease management. Once a COVID-19 vaccine is approved, its distribution will begin almost immediately. To accelerate the process, many governments have started placing pre-orders, which means that vaccines under development are currently already manufactured (even if certification is pending). For example, the Serum Institute of India plans to produce at least 4 million-5 million doses per month of the AstraZeneca/Oxford vaccine while it is still in clinical trials.
Questions have arisen over who and which country or countries will get access to the first batches. The Coalition for Epidemic Preparedness Innovations, which seeks to enable equitable access of vaccines in developing countries, has provided funding to several programs. These national government investment programs raise the issue of "vaccine nationalism" and could pose an ethical challenge for biopharmaceutical companies in the form of prioritizing supply. Similarly, strategies need to be designed for who will be prioritized in getting the vaccine, be it the more elderly and sick. Ultimately, there needs to be a containment strategy. This will inevitably require more global coordination and accessibility by all nations, as well as how to deal with anti-vaxxers.
Read the full article here.
Sovereigns And International Public Finance
The pandemic continues to weigh on sovereign ratings, but so do governance factors.
Table 2
| Sovereigns And International Public Finance ESG-Related Rating Changes | ||||||||
|---|---|---|---|---|---|---|---|---|
| Downgrade | CreditWatch negative | Outlook revision | Total ESG-related rating actions | Downgrade | Total ESG-related rating actions | % of total ratings affected by ESG | ||
| June 2020 | April-June 2020 | |||||||
| Sovereigns | 2 | 0 | 5 | 7 | 9 | 38 | 20% | |
| International public finance | 2 | 0 | 7 | 9 | 5 | 39 | 11% | |
The pace of ESG-driven sovereign rating actions slowed down somewhat in June from April and May, with speculative-grade ratings remaining the most affected. The revision of our outlook on Japan back to stable was an exception reflecting reduced financial flexibility. So was the negative outlook revision on Malaysia, which also reflected governance factors, besides COVID-19.
Governance factors were most obvious in the downgrade of Costa Rica, where two finance ministers have stepped down in the past six months. In addition, the pandemic pushed Belize, an already low-rated sovereign, to the verge of default; we lowered the rating to 'CC' and placed it on CreditWatch negative when it announced a likely debt restructuring or missed coupon payment.
Mostly because of the pandemic's devastating effect on output, employment, trade, tourism, and public finances, the rated sovereign universe bias has turned sharply negative (-24 at end June down from +1 at end 2019).
Local and regional government rating and outlook changes were also predominantly sovereign-driven, although the pandemic has added to existing budgetary pressures and contributed to an increasing share of negative outlooks on highly rated Swedish municipalities. The Brussels region joined the ranks of other large capital cities, such as Rome, Paris, London, and Lisbon with earlier negative rating impacts due to the pandemic. These cities' high population densities, sensitivity to travel, consumer spending, tourism, and in some cases the freeze in the property transaction market, continue to hurt them more than other local and regional governments.
Recent governance controversies left the ratings on the African Development Bank (AfDB) unchanged because we found the allegations against the president are being addressed through the appropriate channels and are in line with our adequate governance and management assessment, a level already lower than most supranational peers.
Case Study
Costa Rica Long-Term Ratings Lowered To 'B' On Policy Uncertainty Amid Worsening Public Finances; Outlook Negative June 9, 2020
The downgrade reflects a larger and persistent worsening in Costa Rica's public finances following a deeper-than-expected economic contraction in 2020. In addition, the downgrade follows mixed signals from the government about whether it will vigorously implement aspects of the 2018 fiscal reform. Poor policy implementation could worsen our view of Costa Rica's institutional strengths and reduce the sovereign's access to market funding.
At the end of May 2020, former finance minister Rodrigo Chaves resigned after Congress exempted local governments from complying with aspects of the 2018 fiscal reform law, and President Alvarado then signed the legislation. The negative signal these events send--more than their direct budgetary impact--weighs on the rating. This was the second finance minister to step down in the last six months amid tensions within the administration over the implementation of the landmark fiscal reform, reflecting disagreement over its scope and comprehensiveness and the pace of fiscal adjustment.
Costa Rica's fiscal and external profiles are complicated because of rigidities and long-standing vulnerabilities in the government's debt management procedures. Congress has often held back approval for the government to issue external debt, forcing it to rely on a small domestic market. Such political obstacles have weakened the predictability of debt management and reduced the government's financial flexibility.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
- Health and safety
- Governance
U.S. Public Finance
Despite a gradual reopening of the U.S. economy in June, some U.S. public finance sectors remain pressured by health and safety social risks stemming from the pandemic, leading to multinotch downgrades.
Table 3
| U.S. Public Finance ESG-Related Rating Changes* | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Downgrade | CreditWatch negative | Outlook revision | Total ESG-related rating actions | Downgrade | Total ESG-related rating actions | % of total ratings affected by ESG | ||||||||||||
| June | April-June | |||||||||||||||||
| TOTAL | 21 | 0 | 5 | 26 | 45 | 532 | 3% | |||||||||||
| State and local governments | 11 | 0 | 2 | 13 | 19 | 250 | 2% | |||||||||||
| Higher education | 2 | 0 | 1 | 3 | 5 | 156 | 26% | |||||||||||
| Health care | 2 | 0 | 2 | 4 | 4 | 49 | 10% | |||||||||||
| Utilities | 1 | 0 | 0 | 1 | 3 | 29 | 2% | |||||||||||
| Housing | 1 | 0 | 0 | 1 | 7 | 25 | 7% | |||||||||||
| Charter schools | 0 | 0 | 0 | 0 | 1 | 15 | 4% | |||||||||||
| Transportation* | 4 | 0 | 0 | 4 | 6 | 8 | 3% | |||||||||||
| *Excludes 187 negative outlook revisions on March 26 on almost all public transportation infrastructure issuers. | ||||||||||||||||||
Social risks continued to dampen signs of a broader economic rebound, driving health and safety-related rating actions in June across multiple sectors in U.S. public finance. While the number of ESG-driven rating actions was considerably lower--April and May had many outlook revisions--downgrade activity actually increased in June. Local governments experienced 11 downgrades, of which six were multinotch linked to priority-lien bonds secured by hospitality taxes like those levied on hotel rooms for lodging purposes. For example, we downgraded the Washington State Convention Center (WSCC) Public Facilities District in Seattle to 'BBB+' from 'AA-', reflecting a 60% decline in lodging taxes in 2020, with an expectation that collections will not return to pre-pandemic levels until 2024. All events at the convention center were canceled through July 15. The stress in the hospitality sector indicates the precipitous decline in revenue due to canceled or postponed conventions throughout the U.S. until at least 2021 to limit transmission of the virus. The outlooks on these ratings were revised to negative earlier in the year when stay-at-home orders and mobility restrictions were implemented. We remain concerned that, in some instances, a lack of business could result in reserve draws to make debt service payments.
Not-for-profit transportation infrastructure remains another area of continued rating activity, as we lowered the ratings on two parking systems by multiple notches as the bulk of Americans continue working from home. Combined with limited social activities, demand for parking services has significantly hurt financial performance. Furthermore, we downgraded two large hub airports in June consistent with our view of stress in the sector (see "Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure," published June 4, 2020). Despite a modest uptick in passenger volume around Memorial Day, air passenger activity remains approximately 70%-75% below 2019 levels, which will continue to weaken operational and financial metrics.
Finally, several downgrades also took place in higher education and health care. Notable was the multinotch downgrade of student accommodation provider Provident Group-Kean Properties due to the sudden drop in occupancy as students vacated the residence facility following the onset of the COVID-19 pandemic and Kean University transitioned to remote learning.
Case Study
Port Authority Of New York & New Jersey Consolidated Bond Rating Lowered To 'A+' From 'AA-' On Depressed Activity Levels, June 26, 2020
The port authority oversees multiple and high profile transportation, office space, and marine terminal assets serving New York City and the surrounding region including the World Trade Center, the Lincoln and Holland tunnels, as well as airports including John F. Kennedy International, LaGuardia, and Newark Liberty International. Aviation activity experienced a 92% decline for the period June 8, 2020 to June 12, 2020 compared to the average weekday use in June 2019. We believe activity levels will be severely or materially depressed or unpredictable for 2020 and beyond due to COVID-19 outbreaks, which has diminished the authority's overall credit quality, stressing its financial performance over the intermediate term. We expect this demand impact to particularly affect the authority's aviation division, which has been one of its key cash flow-positive business segments historically. Furthermore, the governor has enacted required quarantine restrictions on travelers from a significant number of states and territories, which will likely reduce domestic tourism that could have potentially supported activity levels despite ongoing federal restrictions on international visitors.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
- Health and safety
Corporates And Infrastructure
Hotels, restaurants, leisure, and transportation were most directly affected by COVID.
Table 4
| Corporates And Infrastructure ESG-Related Rating Changes | ||||||||
|---|---|---|---|---|---|---|---|---|
| Downgrade | CreditWatch negative | Outlook revision | Total ESG-related rating actions | Downgrade | Total ESG-related rating actions | % of total ratings affected by ESG | ||
| June | April-June | |||||||
| TOTAL | 48 | 4 | 20 | 76 | 268 | 448 | 13% | |
| Transportation and transport infrastructure | 9 | 1 | 3 | 13 | 48 | 75 | 41% | |
| Automotive | 6 | 0 | 2 | 8 | 34 | 70 | 79% | |
| Hotels and gaming | 6 | 1 | 3 | 10 | 44 | 61 | 49% | |
| Media and entertainment | 10 | 2 | 2 | 14 | 36 | 45 | 32% | |
| Real estate | 0 | 0 | 3 | 3 | 9 | 33 | 20% | |
| Retailing | 4 | 0 | 1 | 5 | 24 | 33 | 18% | |
| Aerospace and defense | 5 | 0 | 1 | 6 | 22 | 29 | 45% | |
Since March, we've believed that COVID-19 was not just another crisis and that sectors such as transport, hotels, restaurants, and leisure would be challenged more structurally and for longer, hence the high percentage (40-50%) of ratings affected in these segments from April to June (see table 4). Some high-profile examples include:
- Transport, notably air traffic and airspace. Downgrades in June include Australia Pacific/Perth/Adelaide airports, Deutsche Bahn, Embraer, and several U.S. airlines.
- Automotive. Downgrades in June include Mitsubishi Motors, Beijing Automotive, and Delphi Automotive.
- Media, entertainment, hotels, restaurants, and leisure. Downgrades include InterContinental Hotel Group, Carnival Corp., and Tui, in addition to the default of 24 Hour Fitness
The percentage of ESG-related rating changes for the corporate universe as a whole is considerably lower, at 13%, bearing in mind that we only treat COVID-19 as an ESG credit factor if the impact on the business is direct (see Appendix). The all-in number of rating changes, including indirect impacts from COVID-19, currently stand at just above 20% of all corporate ratings (see "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date").
Finally, we had four positive COVID-19-related rating actions resulting from increased demand for nondiscretionary/food products (e.g. X5 Retail Group and BJ's Wholesale Club Holdings), for recreational vehicles (e.g. Winnebago Industries), and increased consumption of household sanitization and personal care products (e.g. Knowlton Development).
Case Study
Embraer Downgraded To 'BB+' From 'BBB-' On Lower Aircraft Deliveries And Weaker Credit Metrics, Outlook Negative, June 15, 2020
The COVID-19 pandemic is posing serious challenges for the global aviation and aerospace industry. Actions to contain the pandemic, including government-imposed social-distancing measures, travel restrictions, and stay-at-home orders, have sharply reduced global demand for air travel.
Regional aircraft demand should be the first to rebound, partly supporting Embraer's recovery in 2021.
With the termination of the Master Transaction Agreement (MTA) with Boeing and COVID-19 effects, Embraer will post a shortfall in FOCF and high leverage metrics this year. Despite delivery deferrals, the company has yet to register cancellations, and backlog remains strong. We believe Embraer will likely be among the first aircraft manufacturers to benefit from the industry recovery, given that its commercial aviation focus and leadership is in smaller planes designed for regional markets, while its defense and executive jets, which represented about 50% of total revenue last year, are more resilient.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
Health and safety
Case Study
U.S.-Based Carnival Corp. Downgraded To 'BB-' From 'BBB-', Ratings Remain On CreditWatch Negative; New Debt Rated, June 23, 2020
We expect Carnival's credit measures to remain very weak through 2021 because of its plans for a gradual reintroduction of capacity and our forecast for continued weak demand.
We believe cruise operators will implement social distancing and other health and safety measures on their ships to reduce the spread of the virus. We believe these social distancing measures may limit the maximum potential occupancy of the ships and potentially reduce their operators' profitability and cash flow. We also believe that lower demand and lingering travel fears may hurt their occupancy.
Nevertheless, we believe there continues to be a high degree of variability in our currently contemplated recovery path, particularly with respect to how its consumers will respond to continued flare-ups or waves of the virus in the absence of a vaccine or effective treatment.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
- Health and safety
Case Study
PT Saka Energi Rating Lowered To 'B+' On Weaker Expected Support From PGN; Outlook Stable, June 2, 2020
We believe PT Saka Energi Indonesia's strategic importance within parent company PT Perusahaan Gas Negara Tbk. (PGN) has declined given the latter's increasing focus on transmission and distribution, recurring delays by PGN on extending the maturities on the shareholder loan, and lesser ability to extend support in light of unfavorable government regulations. Such recent communication also leads us to question PGN's involvement and oversight of Saka Energi's operations. We now consider a one-notch uplift to Saka Energi's SACP, compared with a three-notch uplift previously.
Environmental, social, and governance (ESG) factors relevant to the rating action:
- Strategy, execution, and monitoring
Financial Services
Financial services experienced few direct ESG impacts, even though COVID-19 triggered widespread negative outlook revisions.
While the banking and insurance sectors have seen hardly any rating changes or outlook revisions over April-June directly attributable to ESG factors, they have been susceptible to indirect impacts, namely rising credit risks and financial market volatility resulting from the COVID-19 pandemic. As of the end of June, we took rating actions on about 210 banks that were indirectly related to COVID-19 and the oil shock, accounting for roughly 25% of the total, with about three-quarters being outlook revisions. For the insurance sector, the total was 17% (14% being outlook changes).
Structured Finance
ESG-related rating actions trail underlying corporate credit quality issues.
Table 5
| Structured Finance ESG-Related Rating Changes | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Downgrade | CreditWatch negative | Outlook revision | Total ESG-related rating actions | Downgrade | Total ESG-related rating actions | % of total ratings affected by ESG | ||||||||||||
| June | April-June | |||||||||||||||||
| Total (all sectors) | 45 | 137 | N/A | 182 | 61 | 437 | 1% | |||||||||||
| ABS | 1 | 0 | N/A | 1 | 1 | 40 | 1% | |||||||||||
| CMBS | 19 | 97 | N/A | 116 | 19 | 242 | 9% | |||||||||||
| Repack* | 2 | 0 | N/A | 2 | 16 | 19 | 13% | |||||||||||
| Nontraditional assets** | 23 | 40 | N/A | 63 | 25 | 136 | 11% | |||||||||||
| *Repack ratings are weak-linked to the ratings of the underlying securities (and do not include CLOs). **Nontraditional structured finance asset classes include corporate, aircraft, container, railcar, timeshare, small business, and triple-net lease securitizations. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. N/A--Not applicable. | ||||||||||||||||||
ESG-related rating actions in June continued to be driven by commercial sectors where health and safety considerations have a more direct impact. The most affected have been CMBS with hotel and retail exposure, and whole business securitizations including pubs, fast-food restaurants, and gyms (nontraditional assets; see table 5).
Following initial CreditWatch placements due to the outbreak of COVID-19, there was a pickup in negative rating actions in June with 22 multinotch downgrades and 23 single-notch downgrades. Several of these tranches also remain on CreditWatch negative, leaving 403 tranches affected by COVID-19 on CreditWatch negative as of the end of June.
For collateralized loan obligations we rate, while there have been recent rating actions, we determined that in general COVID-19 did not directly affect ratings given the significant diversification by obligor and industry in the collateral pools.
Case Study
Ratings On 96 Classes From 30 U.S. CMBS Conduit Transactions Placed On CreditWatch Negative, June 3, 2020
In our view, the subject bonds, which are primarily speculative-grade classes from the CMBS 2.0 cohort, are at an increased risk of experiencing monthly payment disruption or reduced liquidity. This is mainly due to their higher exposure to loans secured by lodging or retail properties. These sectors have been negatively affected by location closures and a rapid decline in demand due to COVID-19.
The CreditWatch placements also include 12 investment-grade bonds from deals which exhibit a higher degree of event risk, due to their exposure to specific outsized loans of concern secured by lodging or retail properties, which is not offset by transaction deleveraging. In addition, these transactions generally exhibit more pronounced payment and liquidity risk due to the volume of large, concerning assets already with the special servicer.
Environmental, social, and governance (ESG) factors relevant to the rating action:
- Health and Safety
Case Study
FCT Sinople Finance's Rental Fleet Senior Notes Downgraded On Increased Operational Risk; Remain On CreditWatch Negative, June 8, 2020
FCT Sinople Finance is a securitization that finances Europcar Mobility Group's (Europcar's) rental fleets in France, Germany, Italy, and Spain. On May 28, 2020, we lowered our long-term issuer credit rating (ICR) on Europcar to 'CCC+' from 'B-' . We subsequently downgraded the ratings of FCT Sinople Finance to reflect our view of the increased operational risk arising from the continued deterioration of Europcar's credit quality.
Importantly, our rental fleet securitization criteria had capped FCT Sinople Finance's ratings at 'A (sf)' when assigned in 2012. Such rating cap reflected the potential ABS rating instability that might result from the bankruptcy of the rental car company, as servicer and sole obligor in the securitization. The cap level derived under our sector-specific criteria depends on the creditworthiness of the rental car company and the extent to which the servicing transition risk is mitigated in the transaction.
Since we set up the original cap at 'A (sf)', Europcar's creditworthiness has deteriorated while the servicing transition risk has increased, notably due to the increase of the complexity of the fleet with the introduction of Goldcar in 2018 and the used-car market uncertainties stemming from COVID-19. In a 'A (sf)' rating scenario a large part of the fleet might have to be liquidated through open-market sales as we assume the buyback agreements with car makers below this rating level would be unenforceable. As a result, we believe the previous cap of 'A (sf)' under our rental fleet criteria is no longer appropriate, considering these elements, and that a revised sector-specific cap of 'BBB (sf)' captures the deteriorated circumstances while continuing to give credit to the mitigation of the servicing risk via the back-up servicer.
Appendix
COVID-19's direct (ESG) versus indirect (non-ESG) impact
We consider the COVID-19 pandemic a social credit factor when we believe health concerns and social distancing measures have a direct impact on an entity's activities. Put differently, our data presented here exclude rating actions stemming from the recession triggered by the pandemic, and from the downturn in oil and gas that started before the COVID-19 outbreak and is tied to oversupply and a price war. For sovereign ratings, however, we see the pandemic's direct and indirect macroeconomic, fiscal, and external impacts as intertwined and feeding into each other, and therefore consider rating actions triggered by the COVID-19-induced recession as health and safety-related.
For the broader statistics of COVID-19 and oil-related downgrades, see "COVID-19 Activity In U.S. Public Finance," "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date," and "COVID-19 Activity In Global Structured Finance ."
We have tagged rating actions tied directly to health and safety concerns as ESG-driven: One of the clearest examples is airlines, which have seen a significant drop in demand due to travel restrictions to stop the spread of the virus. Other examples include auto dealers, which were forced to close their doors due to social distancing requirements, resulting in lost sales for auto manufacturers. Movie theaters, airports, restaurants and leisure activities were/have been shut down due to the virus and local requirements for social distancing, resulting in a total cessation of revenue streams and limitations on large and social gatherings.
For the purposes of classifying ESG impacts, we excluded indirect rating actions tied to the recession triggered by the COVID-19 pandemic: For example, the recession may ultimately increase the risk of nonpayments for banks or depress asset values, affecting insurers. While important, we have not flagged these as ESG. Similarly many corporate sectors are indirectly affected, for instance many consumer products companies have had to reduce their advertising, thereby affecting many media companies. Also, job losses and loss of consumer confidence has stopped buyers from making large consumer products purchases.
Related Research
ESG in ratings industry-related commentaries
- The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus, July 16, 2020
Cross-practice:
- Diversity And Inclusion As A Social Imperative, Aug. 3, 2020
- Why Corporations' Responses To George Floyd Protests Matter, July 23, 2020
- The EU Recovery Plan Could Create Its Own Green Safe Asset, July 15, 2020
- Water Conflicts Are Heightening Geopolitical And Social Tensions Globally, July 7, 2020
- A Pandemic-Driven Surge In Social Bond Issuance Shows The Sustainable Debt Market Is Evolving, June 22, 2020
- People Power: COVID-19 Will Redefine Workforce Dynamics In The Post-Pandemic Era, June 4, 2020
- Environmental, Social, And Governance: Too Late For Net-Zero Emissions By 2050? The Potential Of Forests And Soils, June 4, 2020
- ESG Insights For Sectors Across Corporates And Financial Services Industries, Feb. 11, 2020
- How ESG Factors Have Begun To Influence Our Project Finance Rating Outcomes, Jan. 27, 2020
Sovereigns and supranationals:
- How Multilateral Lending Institutions Are Responding To The COVID-19 Pandemic, June 9, 2020
- Global Sovereign Rating Trends Midyear 2020: Outlook Bias Turns Negative As Governments Pile On Debt To Face COVID-19, July 30, 2020
International public finance:
U.S. public finance:
- COVID-19 Activity In U.S. Public Finance
- Better Data Can Highlight Climate Exposure: Focus On U.S. Public Finance, Aug. 24, 2020
- California Public Power Utilities Face Disparate Physical And Credit Exposures To Wildfires, Aug. 4, 2020
- U.S. Municipal Sustainable Debt And Resilience 2020 Outlook: Sprouting More Leaves, March 4, 2020
Corporates and infrastructure:
- COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, Aug. 19, 2020
- From Bad To Worse: Global Air Traffic To Drop 60%-70% In 2020, Aug. 12, 2020
- COVID-19 Battered Global Consumer Discretionary Sectors But Lifted Staples; Recovery Varies By Subsector, Aug. 4, 2020
- Retail REITs Will Contend With Retail Distress Until At Least 2021, July 21, 2020
- What Does Pharma's Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?, July 8, 2020
- COVID-19 Heat Map: Post-Crisis Credit Recovery Could Take To 2022 And Beyond For Some Sectors, June 24, 2020
- Infrastructure: Global Toll Roads' Steep Climb Out Of COVID, June 19, 2020
- COVID-19 Accelerates Structural Shifts In Global Office Real Estate And REITs, June 9, 2020
- COVID-19 And The Auto Industry--What’s Next?, June 9, 2020
Banks:
- The Greening Of Financial Services: Challenges For Bank And Insurance Green And Sustainability Hybrids, Aug. 12, 2020
- Environmental, Social, And Governance: Islamic Finance And ESG: Sharia-Compliant Instruments Can Put The S In ESG, May 27, 2020
- Climate Change: Can Banks Weather The Effects?, Sept. 9, 2019
Insurance:
- COVID-19 Pushes Global Reinsurers Farther Out On Thin Ice; Sector Outlook Revised To Negative, May 18, 2020
- Sink Or Swim: The Importance Of Adaptation Projects Rises With Climate Risks, Dec. 3, 2019
Structured finance:
- COVID-19 Activity In Global Structured Finance As Of Aug. 14, 2020, Aug. 20, 2020
- U.S. CMBS Conduit Update Q2 2020: COVID-19 Impact Still Emerging; Questions Remain, July 16, 2020
ESG in ratings criteria-related commentaries
Cross-practice:
- The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis, Sept. 12, 2019
Sovereigns and local and regional governments:
- How Environmental, Social, And Governance Factors Help Shape The Ratings On Governments, Insurers, And Financial Institutions, Oct. 23, 2018
U.S. public finance:
- Through the ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, April 28, 2020
- When U.S. Public Finance Ratings Change, ESG Factors Are Often The Reason, March 28, 2019
Corporates and infrastructure:
- How Management & Governance Risks and Opportunities Factor Into Global Corporate Ratings, Nov. 7, 2018
- How Social Risks And Opportunities Factor Into Global Corporate Ratings, April 11, 2018
- How Environmental And Climate Risks Factor Into Global Corporate Ratings, Oct. 21, 2015
Banks:
- How Environmental, Social, And Governance Factors Help Shape The Ratings On Governments, Insurers, And Financial Institutions, Oct. 23, 2018
Insurance:
- How Environmental, Social, And Governance Factors Help Shape The Ratings On Governments, Insurers, And Financial Institutions, Oct. 23, 2018
Structured finance:
- ESG Credit Factors In Structured Finance, Sept. 19, 2019
This report does not constitute a rating action.
| Primary Credit Analysts: | Karl Nietvelt, Paris (33) 1-4420-6751; karl.nietvelt@spglobal.com |
| Nicole Delz Lynch, New York (1) 212-438-7846; nicole.lynch@spglobal.com | |
| Patrice Cochelin, Paris (33) 1-4420-7325; patrice.cochelin@spglobal.com | |
| Nora G Wittstruck, New York (1) 212-438-8589; nora.wittstruck@spglobal.com | |
| Matthew S Mitchell, CFA, London (44) 20-7176-8581; matthew.mitchell@spglobal.com | |
| Michael Wilkins, London (44) 20-7176-3528; mike.wilkins@spglobal.com | |
| Kurt E Forsgren, Boston (1) 617-530-8308; kurt.forsgren@spglobal.com | |
| Secondary Contacts: | Emmanuel F Volland, Paris (33) 1-4420-6696; emmanuel.volland@spglobal.com |
| Lawrence A Wilkinson, New York (1) 212-438-1882; lawrence.wilkinson@spglobal.com | |
| Dennis P Sugrue, London (44) 20-7176-7056; dennis.sugrue@spglobal.com | |
| Peter Kernan, London (44) 20-7176-3618; peter.kernan@spglobal.com | |
| Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670; michael.ferguson@spglobal.com | |
| Jesus Palacios, Mexico City (52) 55-5081-2872; jesus.palacios@spglobal.com | |
| Bertrand P Jabouley, CFA, Singapore (65) 6239-6303; bertrand.jabouley@spglobal.com | |
| Timucin Engin, Dubai (971) 4-372-7152; timucin.engin@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.