A little over a year ago, the World Health Organization declared COVID-19 to be a global pandemic, and the world plunged into a steep economic downturn. A slew of negative rating actions quickly followed as S&P Global revised its assumptions to reflect the emerging risk of a sudden drops in revenues. The ratings impact was especially pronounced for weaker, more highly leveraged companies entering the downturn and issuers in sectors heavily affected by social distancing.

There have been a total of 2,118 negative rating actions across corporates, financial, sovereign issuers due to the COVID-19 pandemic and the oil price dislocation. The number of rating actions has declined considerably since the highs in late March/early April 2020. So far in 2021, there have been only 63 negative rating actions at were primarily driven by the pandemic, which is roughly 3% of the total negative actions in 2020. In addition, rating trends point to further credit improvement: Positive rating actions have begun to outpace negative ones over the past few weeks as favorable vaccine developments continue, our economic forecasts turn more positive, and financing conditions remain strong remain strong for both investment-grade and speculative-grade issuers (see Charts 1 and 2).

Chart 1

Since Feb. 3, 2020, S&P Global Ratings has downgraded 1,320 global corporate (financial and nonfinancial) and sovereign issuers and upgraded on 59; 85% of these actions were directly related to the global pandemic, depressed oil prices, or both. Over 95% of global downgrades in that period were in 2020, while most of the upgrades have been this year. Much of the recovery has been due to stabilization, as over half of the issuers with recent positive rating actions experienced one or more negative rating actions last year. In addition, largest number of positive rating actions have been positive outlook revisions; we've revised over 85% of outlooks to stable from negative.

Both downgrades and upgrades have been largely on speculative-grade issuers (see Chart 3). Issuers rated 'B' had the largest number of negative rating actions, which led the number of issuers rated 'CCC' and lower to balloon to an all-time high in 2020 (see Chart 4). However, due to a combination of limited rating actions in the latter half of 2020 as well as improving credit quality for some issuers due to better-than-expected recovery, there has been a fair share of upgrades. This has decreased the number of issuers rated 'CCC' or lower, but the tally remains elevated. Market access for lower-rated issuers, though still limited, has also contributed to the increase in upgrades. This is because some issuers have been able to refinance upcoming maturities and have taken measures to lower costs and preserve cash.

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Regional Divergences Emerge As Ratings Stabilize

Downgrades globally have been largely due to COVID-19 and the oil price dislocation, though some were for idiosyncratic unrelated reasons. North America had the most downgrades, with the largest numbers from the energy and capital goods sectors. About 60% of total global downgrades and 78% of upgrades were in the North America, which accounts for just under half of rated issuers globally (see Chart 4). In addition, North America had the highest ratio of upgrades to downgrades at 11%, indicating credit metrics in the region are recovering more quickly than elsewhere. Much of the recovery has been among companies with speculative-grade ratings, many of which had been lowered in 2020. Credit conditions in the region have remained favorable for most borrowers due to continued government support and optimism that the end of the health crisis might soon be over as the coronavirus vaccine rollout proceeds (see "Credit Conditions North America Q2 2021: As Outlook Brightens, Risks Remain," March 30, 2021).

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Sector Median Ratings Continue To Drop Due To The High Number Of Downgrades

The median rating in four of the 13 sectors--consumer services, health care/chemicals, technology, and media/leisure--dropped from just one year ago due to the spike in downgrades in 2020. All four of these sectors had median ratings in speculative-grade territory before the pandemic, which is not surprising given the most vulnerable issuers tended to be affected more significantly.

By sector, the automotive and media and entertainment sectors had the most downgrades as a percent of total ratings, with more than 40% of issuers downgraded. Both sectors were hit hard in the earlier months of the pandemic, and their recovery remains largely uneven. So far, the most positive rating actions have come from the consumer product (largely consumer staples and consumer discretionary) and technology sectors. This is because they've both benefited from the abrupt changes normal daily activities and social-distancing protocols. The energy sector has also had a fair share of upgrades so far in 2021. Oil prices have continued to rise, relieving some revenue pressure for issuers with lower speculative-grade ratings.

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Table 1

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Nearly Three-Fourths Of International Public Finance Rating Actions Were Related To COVID-19

The pandemic eroded revenues and increased spending needs of local and regional governments (LRGs) across the world, in most cases translating into rising debt burdens. Among the pandemic-related negative rating actions, over two-thirds were on LRGs, followed by transport infrastructure. Going into 2021, credit risks for many LRGs worldwide will likely be defined by the economic recovery path. The willingness and ability of LRGs to provide a fiscal response to economic challenges--as well as the availability of additional funding from their respective sovereign and regional governments--will also be key risks.

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Project Finance: One-Third Of Transportation Projects And One-Fourth Of Social Infrastructure Projects Were Downgraded In 2020

Our rated portfolio of project finance transactions totals just over 300 credits. It's roughly 30% power, 30% transportation, and 30% social infrastructure--with most of the remainder being oil and gas and industrial projects. The impact of the COVID-19 pandemic fell chiefly on transportation and social infrastructure projects exposed to volume-based revenues, such as tollroads, airports, convention center hotels, and stadiums. The power portfolio was much less affected. Energy demand was much more stable than usage volumes on tollroads and accommodation projects, and many power-related projects benefited from structures that included some combination of a fixed energy sales price, price hedging, passthrough of fuel and volume risk, and cash-flow sweep structures that were resilient to large variations in cash flows.

Across the entire portfolio, the downgrade to upgrade ratio, which was about 1.2 to 1.0 in 2019, surged to 3.8 to 1 in 2020, though this ratio started to come back down in the first quarter of 2021. In 2020, we downgraded about 33% of the transportation projects, 17% of the social infrastructure projects, and 12% of power projects. Most of the rating actions were directly attributable to the COVID-19 pandemic and the impact of the associated economic shutdowns and travel restrictions. Decreases in oil and power prices did affect some projects but had a much smaller overall impact on rating stability.

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Appendix

Table 2

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Related Research

• Potential Downgrades Fall Sharply, Though Remain At Elevated Levels, April 1, 2021
• Global Credit Conditions Q2 2021: The Risks Of An Uneven Recovery, March 31, 2021
• Credit Conditions North America Q2 2021: As Outlook Brightens, Risks Remain, March 30, 2021
• Risky Credits: Net Upgrades And Higher Oil Prices Offer Some Relief To The Weakest-Rated Companies In The U.S. And Canada, March 17, 2021