As the global economy slogs up what will surely be a long, hard path to recovery, credit conditions throughout much of the developed world are largely constructive, especially for higher rated borrowers. Credit rating trends have also stabilized and the wave of negative ratings actions we saw in the first months of the pandemic has ebbed, but not ended. Credit measures were weak in many sectors prior to the pandemic, as we noted in our June report on post-COVID recovery, and we expect it to take until 2023 and beyond for a full recovery to take hold for the hardest-hit sectors. In this article, we share our updated regional estimates of when credit metrics might reach a run-rate recovery back to 2019 levels.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment become widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research at www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. Our assumptions and analyses factored into our ratings are updated continuously as developments unfold.

The divergence in the shape of the recovery has become more pronounced, with travel and leisure sectors continuing to struggle with low demand and higher debt balances. Conversely, sectors that align with trends in improving living and work-from-home conditions are faring better than initially expected, in some cases. Corporations that have been nimble in adapting to the new environment--by successfully transitioning to a remote workforce or responding to a shifting demand landscape, for instance--are faring better than peers that were slow to react.

Some bright spots have emerged compared to our prior expectations

For the homebuilders and building materials sectors in many regions, the news has been better than we previously expected. Construction has been deemed a necessary function in many regions, which has kept up demand for building materials. Interest rates remain extremely low and, with the help of government support, consumer spending has held up fairly well, both of which have supported new home sales in developed markets. Consumers' desire to better their living conditions has improved our recovery prospects for these sectors and for some specialty retailers (home goods, electronics, fitness equipment, etc.) in several regions.

We still expect a recovery in the auto sector to take several years, but the outlook varies by region. We expect global light vehicles sales will fall 20% this year compared with 2019, which is at the more pessimistic end of the 15%-20% projection we made in March this year. But signs of improvement started to show in China during the second quarter, and we saw some stabilization in Europe and North America in July and August. We have revised our projections for global vehicle sales growth upward to 7%-9% in both 2021 and 2022.

Demand for travel-related services, especially related to air travel, remains low. We now expect global air passenger traffic to drop by 60%-70% in 2020 compared with 2019, a steeper decline than we estimated previously. We also expect a more gradual recovery to pre-COVID-19 traffic levels by 2024, as these sectors may face ongoing social distancing rules, capacity restrictions, higher operating expenses, and reluctant consumers until we have widespread vaccination. More broadly, we expect consumers will make permanent shifts in how they work, shop, and spend their leisure time even after a vaccine becomes available.

Incremental debt remains a key rating factor to the recovery of credit metrics. Many industries that were facing high fixed costs or drastically lower revenue (or some of both) during the virus restrictions were forced to dip into cash balances or borrow to fund operations, the latter being aided by central banks' measures to bolster market liquidity. Constructive financing conditions have helped companies issue debt, which has been helpful in the short term but raises larger concerns about credit profiles in the intermediate term. While revenue for these sectors may recover as soon as next year, a full recovery of credit metrics will take longer as companies dig out of the higher debt load they now carry. There could also be more permanent shifts in financial policy that keep incremental debt on the balance sheet. With the prospect of interest rates remaining low for an extended period, we could see a shift back to growth initiatives, dividend recapitalizations, and mergers and acquisitions (M&A) that could further delay a recovery of pre-COVID credit metrics.

The return to pre-crisis levels of operations and credit metrics is unlikely to be smooth or swift, and will depend on how governments, businesses, and consumers behave. We see the risk of modification of industry dynamics as highest for sectors indicated in the regional "Sector Level Impact and Recovery" charts ("LT Industry Disruption/Acceleration"), which could delay or even prevent a return to pre-crisis-level credit metrics.

Regional Heat Maps

For each region, we have assessed the following based on the rated universe of credits:

• The impact of COVID-19, global recession, or the collapse of oil and gas markets in 2020. The impact descriptor (high, moderate, low) is our qualitative view of the degree of impact to the sectors' operations and credit metrics. It does not directly translate to risk of rating actions, which depend on a number of factors, including initial headroom under a rating coupled with the expected length and severity of the crisis.
• 2020 estimates of impact on revenue and EBITDA for the rated universe in the region. Incremental borrowings is a directional estimate of additional debt the sector will carry into next year, which we expect to update and refine over time.
• 2021 estimates of revenue and EBITDA shortfalls relative to 2019 levels. For sectors where we expect revenue and/or EBITDA to be at or better than 2019 levels next year, we use the descriptor '=>2019'.
• Longer term industry disruption/acceleration of pre-existing shifts. For sectors exposed to higher risk of longer term changes in consumer government or corporate consumption patterns, or an acceleration of a secular change that could delay or disrupt a recovery of credit metrics, we have marked the sector with 'Yes'.

Asia-Pacific (APAC)

Operating performance and recovery of credit metrics across corporate sectors in APAC is largely in line with what we had anticipated in June. Consumer-focused sectors such as telecom, consumer staples, and essential retail have proven more resilient, while transportation, hospitality, and commodity-focused sectors (e.g. oil and gas, chemicals, metals and mining, and automobiles) have been less so. Cash burn continues in the high-fixed-cost airlines, hospitality, and gaming sectors despite layoffs and cost adjustments. While operating conditions vary within the transportation infrastructure segment, tolls roads are faring better than airports (we expect the former to reach over 90% of pre-COVID levels within next 6-12 months, while the latter are unlikely to get there before 2024). We have not changed our base-case recovery assumption for the majority of these sectors.

Yet, the road to recovery within APAC is one of increasing divergence. Operating and funding conditions are somewhat better in China and other countries where the pandemic appears to be under control and in which consumer sentiment and spending is picking up. In China, rolling-three-months retail sales are showing gradual improvement compared with pre-pandemic levels. They are also up nearly 10% in July and August 2020 in Australia compared with 2019. In China, capital markets are increasingly opened, even for speculative-grade credits (albeit at sometimes shorter tenors and higher cost than pre-COVID level).

The situation contrasts with Southeast Asia (particularly Indonesia) and India. Cases there continue to rise, localized lockdowns remain on the card, and macroeconomic contraction appears worse than we anticipated a few months ago. Our economists now expect GDP to contract 9% in India for the year ended March 31, 2021. The contraction is much sharper than the 5% contraction our economists previously expected in the country. In Indonesia, we expect GDP to contract 1.1% in 2020 (versus the previous GDP growth projection of 0.7% (see “Economic Research: Asia-Pacific's Recovery: The Hard Work Begins,” published on Sept. 24, 2020). The real estate and commodity sectors in Indonesia remain depressed. and capital markets are closed to all but a handful of blue-chip or government-owned issuers. Bank funding there is increasingly selective, even to state-owned companies.

Recovering sooner than our initial projections in June

Consumer Staples:   This sector has been recovering somewhat faster than we had anticipated across most of APAC, particularly in China, Australia, and New Zealand, where e-commerce investments seem to have paid off and where consumer sentiment has gotten a boost from the impression that the countries are "early exitters" of the pandemic. Meanwhile, contaminations keep rising in Indonesia and India and weigh on consumer sentiment; and online sales, while growing, remain small in those countries, likely pushing back a recovery in credit metrics to later in 2021.

Autos:   Growth in auto sales in China turned positive in April and have remained in positive territory since then. We now believe light vehicle sales in China will expand in by 4%-6% in 2021 and by 2%-4% the year after. We expect credit metrics in APAC's auto sector to recover in 2023, one year earlier than we originally expected, amid this somewhat faster volume growth.

Europe, The Middle East, Africa (EMEA)

In EMEA the trend across corporate sectors is about in line with our June expectations. Overall the eurozone economy has recovered faster than we expected from the first wave of COVID-19. As soon as lockdowns were lifted, consumers resumed spending. However, enthusiasm has already cooled down due to concerns related to a second wave of COVID, as well as uncertainty about the extension of the current government supporting schemes and the implementation of the EU recovery plan. Still, a few sectors have not rebounded at all as they have been directly hit by restrictions on mobility, particularly airports, airlines, and leisure.

Recovering sooner than our initial projections in June

Toll Roads:  People seem to prefer cars to other modes of public transport in several European countries, supporting traffic on motorways. So, now we expect credit metrics for the sector to recover to 2019 levels by the end of 2021, earlier than we initially estimated.

Positive Revision--No material change to recovery timeframe

Building materials:  Operating performance will be less impacted than we initially assumed, largely due to quick actions taken by companies to reduce costs. We now expect that on average the EBITDA decline in 2020 will be aligned with revenue decline. On the revenue side, there is significant discrepancy between countries, mainly reflecting the difference of the actions taken by the government to limit pandemic.

Shipping:  Current industry data points to a drop in trade volume for full-year 2020 that's shallower than we expected in June, as the movement of essential goods, strong pick-up in e-commerce, and shift of spending from services to tangible goods are driving the shipping volume recovery, in particular in container liner sector. As a consequence, we have revised our assumption for the drop in volumes shipped to negative 5% to 10% for the year from 10% to 15%. We expect the EBITDA and profitability performance to fare relatively well because the higher freight rates and lower bunker fuel prices will offset the reduced volumes, while container liners continue to control fixed costs.

Automotive:  The sector remains under pressure in 2020, but revenues and operating profit could suffer slightly less in 2021 than we initially expected. Restructuring measures will moderate EBITDA declines beyond our June forecasts. We assume government incentives, which have supported auto sales, will be extended. Electrification of passenger cars and hydrogenation of commercial vehicles will resume, given that a delay in these investments would slow the transition to sustainable mobility.

Metals:  This sector is supported by the solid recovery of Chinese demand. Some miners are benefitting from strong iron ore and gold prices and the fall in demand for steel has been lower than our initial forecast. Steel has benefited from furlough schemes and industry rationalization of capacity.

Recovering later

Paper and packaging:  Recovery to 2019 levels is now pushed out to 2022. We expect pulp and graphic paper prices to remain low. In packaging, we see less impact because of the exposure to the food industry, which is proving to be resilient.

Transportation infrastructure:  We have once again revised downwards our expectations for both airports and airlines. Ongoing mobility restrictions and public health advice are resulting in a slow return to air travel. We expect more negative EBITDA impact in 2020 and 2021, although incremental debt will depend on each airport's actions to preserve cash. We have pushed the forecast for recovery in credit metrics to 2024.

Downward revisions--No change to recovery timeframe

Lodging and hospitality:   We expect recovery to be slow and fragile, with full recovery in 2023. Luxury and upscale markets could take longer to recover than midscale and economy segments. Demand for domestic travel for leisure or for small and midsize enterprises (SMEs) is holding up as consumers remain in their home country. We expect differences among geographies as local jurisdictions are applying different rules on mobility.

Cruise lines:   This sector had been facing systemic pressure pre-COVID. We have revised our 2021 EBITDA decline downward to above 50% from 30%-40%. European cruise operators are more niche players than mass market ones, and this might help, but given the operational leverage inherent in the business model, as long as travel remains subdued metrics are likely to remain well below 2019 levels.

Latin America (LatAm)

The recovery path for nonfinancial corporations is selectively taking shape. Peru, Argentina, and Mexico will face a double-digit GDP contraction in 2020 but there could be a marginal recovery next year. Although Chile and Brazil will also fall into a mid-single digit recession in 2020, we believe both countries have better recovery prospects, which would be supportive of companies exposed to these two markets.

Recovering sooner than our initial projections in June

Building Materials:   Most LatAm countries consider construction an essential activity, and cement volumes have performed better than what we had originally expected in all key market of the region. We now expect a recovery to pre-COVID levels in the second half of 2021 on average, with Brazil potentially emerging faster than other markets if housing momentum sustains.

Homebuilders:   We saw stronger-than-expected results for LatAm homebuilders in the second quarter, and have slightly revised our estimates for 2020 and 2021. We now expect 2020 to show a 10%-15% contraction in sales and EBITDA versus 2019, and a recovery to pre-COVID levels in the second half of 2021. Because the industry is very local, the path to recovery will differ by country. In Brazil, for example, lower interest rates are supporting stronger momentum, while downside risks prevail in Mexico, in light of rising unemployment and the lack of subsidies.

Metals & Mining:   The results are mixed. Iron ore and copper prices rose in 2020, so revenues will grow, with depreciated currencies increasing cost competitiveness and further boosting EBITDA. The performance of long steel players has improved, while demand for flat and specialty steel (directed to the automotive sector) could decline around 15%-20% in the year. A couple of rated steel companies are exposed to flat steel, although their integration into iron ore partly mitigates downside risks.

Consumer Agribusiness:  Our view of the agribusiness sector is largely a product of our view of issuers in the sugar cane business. These companies are benefitting from higher sugar and ethanol prices in local currency terms, particularly in Brazilian reais, although persistent risks of renewed mobility restrictions could push prices down during the harvest off-season months. We now expect the revenue and EBITDA decline of 2020 to be less severe than in our previous base case.

Recovering Later

Lodging and hospitality:   Occupancy rates will be low in 2020, and recovery will depend upon improvement in business and economic conditions for business lodging and on pandemic resolution for leisure lodging.

Transportation Infrastructure:   Recovery will vary by asset class (e.g. toll roads versus airports). We expect the slowest recovery to be in airports because of the drop in passenger traffic.

North America

The recovery looks much as we expected a few months ago, with adjustments on the margin, both positive and negative. The U.S. economy has taken a few promising steps toward recovery, with consumer spending largely resilient through the summer and the unemployment rate declining a bit more than we had forecast (though still in recession territory). COVID-19 infection rates have moderated from July, and measures of mobility have stabilized (except for transit, which remains well below pre-crisis levels), as the warmer summer weather kept people outdoors, which likely reduced the spread. (Please see "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020, for our recently updated economic forecast.)

Continued reticence on the part of consumers to resume some forms of travel and leisure activities in the absence of a vaccine or effective treatment has kept those sectors under pressure. On the other hand, with more time spent at home, consumers are investing in home improvement. Heath care services and autos also appear to be benefitting from the pent-up demand.

Recovering sooner than our initial projections in June

Homebuilders and Building Materials:   Record low mortgage rates and the desire to improve living conditions have been a tailwind for entry-level home sales and home improvement trends, supporting our positive revisions for the sectors. Worst-case fears about construction, selling, and consumer sentiment reversed by mid-2020, so we expect most homebuilders will face only modest earnings setbacks this year. Favorable residential building conditions should also help the building materials sector recover credit metrics next year, if issuers can improve earnings to offset high debt levels and elevated costs for business restructuring after several years of M&A.

Business and Consumer Services:   Sector operating performance and credit measures have been in line with or better than expected, mainly as a result of aggressive cost cuts, highly variable cost profiles, the rapid adoption of remote work practices, and the sector's reoccurring demand profile. Business service providers can be a critical component of an enterprise's service or delivery capabilities. Excluding services companies with a high end-market concentration in travel, media, oil and gas, and retail sectors, we believe operating performance for the sector troughed in April-May, and that the sector is generally prepared to respond to additional waves of COVID-19 outbreaks.

Health Care Services:   Health care providers, such as hospitals, saw patient and procedure volumes collapse in late March and April during the early part of the pandemic, but they've been recovering quickly. June and July volumes are generally within 10%-20% of pre-COVID levels, though emergency medical services continues to lag. We believe recovery has plateaued, but will pick up again gradually as the surge eases, as providers improve their delivery processes and procedures, and as patients get more comfortable accessing health care.

Retail Non-essential:   While mall base retailers remain under great pressure, other pockets of retail are well-positioned to benefit from our continued home-centric lifestyle. Consumers are reallocating dollars not spent on travel, entertainment, and dining to their homes in the form of décor, exercise equipment, crafting materials, and entertainment systems, among others. Until consumers return to pre-pandemic behavior patterns, the demand for these products will likely continue.

Recovering Later

Airlines and Commercial Aerospace:   We revised down our global air travel expectations and now expect traffic to fall by as much as 60%-70% in 2020 versus 2019. We expect a more gradual recovery to pre-COVID traffic levels by 2024. We expect airlines to cut capital spending by delaying or canceling aircraft orders.

Hotels:   Discount and extended stay hotels are faring better than expected as consumers have resumed some leisure travel, largely within driving distance of their homes. However, more profitable group and business travel levels remain severely depressed, which is having an outsized impact on the industry on the whole.

Related Research

• COVID-19 Heat Map: Post-Crisis Credit Recovery Could Take To 2022 And Beyond For Some Sectors, June 24, 2020