Number Of Rising Stars Surpasses Fallen Angels In The First Quarter Of 2021

In stark contrast to 2020, rising stars (issuers upgraded to investment-grade from speculative-grade) are exceeding fallen angels (issuers downgraded to speculative-grade from investment-grade) in 2021, as the gradual post-COVID-19 recovery continues. In 2020 there were 49 fallen angels, versus seven rising stars by yearend. So far this year, rising stars outnumber fallen angels, nine to four.

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The global pandemic increased the number of potential fallen angels (issuers rated 'BBB-' with negative outlooks or ratings on CreditWatch with negative implications) to an all-time high of 126 in mid-2020. At the time, almost a fifth of these issuers had ratings on CreditWatch with negative implications, which implies a higher downgrade risk than a negative outlook. As of the end of March 2021, the number of potential fallen angels fell to 84 issuers, with less than five percent on CreditWatch.

However, the 'BBB' category credit risks have not been completely alleviated. The overall negative bias for global 'BBB' category issuers remains higher than it's been in the past decade, despite falling from its recent peak. The lodging and leisure and real estate sectors continue to account for an elevated share of nonfinancial potential fallen angels. For issuers in the lodging and leisure sector, recovery to pre-COVID-19 credit metrics is not expected before 2023, or later. Meanwhile, several real estate companies were added to the list of potential fallen angels in March as they expressed plans for loosened financial policies, with mergers and acquisitions, or share repurchases.

However, the increase in corporates' interest in mergers and acquisitions has been a double-edged sword for credit quality. Six of the nine rising stars this year were upgraded after merging with higher-rated firms, but, several issuers have also expressed interest in levering up for acquisitions, leading to negative outlook revisions, and even downgrades.

While some companies have increased acceptance for looser financing policies, the cost of a downgrade to speculative grade continues to decline. The difference between 'BBB-' and 'BB+' corporate bond spreads is at its lowest since April 2020. Investors' risk appetite has also increased, and the difference between 'BBB-' and 'BB+' spreads have consistently narrowed since mid-2020, as central bank interventions reinvigorated investor demand.

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Nonetheless, on balance, the credit quality of crossover credits, rated 'BBB-' and 'BB+' on the border between investment- and speculative-grade, improved in the first quarter of 2021, appearing much stronger than a year ago.

Only Four Fallen Angels, So Far

In the first quarter of 2021, there were four fallen angels. Unsurprisingly, this year's count is much lower than the 18 over the same period in 2020 when the then-nascent global pandemic began to negatively affect credit quality.

The four issuers downgraded into speculative grade this year include three companies from the challenged sectors of leisure and lodging, oil and gas, and aerospace. The other downgrade was a government-related entity that followed a sovereign downgrade.

• Empresa Nacional del Petroleo was downgraded to 'BB+' from 'BBB-' following Chile's sovereign downgrade.
• Host Hotels & Resorts Inc. was downgraded to 'BB+' from 'BBB-' on weaker-than-expected outlook for its business and group travel segment. Additionally, it expressed an interest in using its cash balances to make opportunistic acquisitions.
• TechnipFMC Plc was lowered to 'BB+' from 'BBB+' as the company completed the spin-off of 50.1% of its stake in its engineering and construction (E&C) business, leaving it solely in the more volatile oil and gas sector.
• Hexcel Corp. was lowered to 'BB+' from 'BBB-' with commercial aerospace customers continuing to decrease their orders as destocking continues.

With fewer fallen angels in the first quarter of 2021, the ratio of fallen angels to investment-grade issuers fell below its 10-year moving average for the first time in a year.

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March Had The Largest Net Decrease In Potential Fallen Angels Since COVID-19

The number of potential fallen angels had net decreases each month after June 2020, when the count peaked at an all-time high of 126. March 2021 had the largest net monthly decrease so far, at 11, with 14 removals and three additions. This brings the total as of March 31, to 84 (and total debt of $456 billion). While this is still elevated compared to pre-COVID-19 levels, the number of potential fallen angels is 33% lower than in mid-2020 (and the total debt associated with potential fallen angels is down by 21%).

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The 14 issuers removed from the list of potential fallen angels in March include:

• Three financial institutions with rating outlooks revised to stable from negative after illustrating better loss-absorbing capacity as consumer creditworthiness held up better than expected, aided by monetary and fiscal stimulus programs; Ally Financial Inc., Discover Financial Services, and Synchrony Financial.
• Four corporates' rating outlooks were revised to stable or positive owing to better-than-expected operating results and/or credit metrics during the pandemic; Kohl's Corp., Lear Corp. (positive outlook), Suzano S.A., and The Timken Co.
• Two oil and gas companies were assigned a stable outlook after S&P Global Ratings revised its price assumptions for West Texas Intermediate (WTI) up to $55 per barrel for 2021 and 2022; Hess Corp. and Ovintiv Inc.
• Two were downgraded and added to the list of fallen angels; Host Hotels & Resorts Inc. and Empresa Nacional del Petroleo.

Additionally, two more were downgraded into speculative grade but are not on the fallen angels list as they no longer had outstanding rated debt by the end of March.

• BFA Tenedora de Acciones, S.A.U.'s negative CreditWatch was resolved with a downgrade to 'BB+' after a completed merger brought BFA's stake in Bankia to non-controlling status.
• Thiess Group Holdings Pty Ltd. was downgraded to 'BB+'from a negative CreditWatch following the downgrade of its parent, CIMIC Group, and its ultimate parent, Actividades de Construccion y Servicios S.A.

There was no rating action on Beijing Capital Group Co., Ltd., but it no longer had outstanding rated debt and was removed from the potential fallen angel list.

Promisingly, nine of the 14 issuers removed from the list of potential fallen angels followed outlook revisions to stable or positive as the economy starts to recover. However, three new potential fallen angels were added to the list as their rating outlooks were revised to negative in March after announcing planned share repurchases or acquisitions. These actions (as well as Host Hotels' downgraded to speculative grade) highlight the risks to creditworthiness from loosening financial policies:

• Austrian real estate firm Immofinanz AG's outlook was revised to negative after expressing intent to launch a voluntary public takeover of its competitor, S-Immo A.G. This could result in deterioration of credit metrics and tighter liquidity.
• U.S.-based SL Green Realty Corp. was assigned a negative outlook as it is likely to continue share repurchases, even as it will probably have a lower-yielding portfolio. Already, proceeds from its asset sales in 2020 were used for acquisitions, development, and share buybacks instead of debt repayment.
• Irish health care firm Perrigo Co. plc had its outlook revised to negative as it intends to use the proceeds from its divestment of its generic pharmaceutical business primarily to fund acquisitions that could increase debt to EBITDA.

Downgrade Risk For 'BBB' Issuers Is Declining

As we mentioned in 'BBB’ Pulse: Fallen Angel Downgrade Risk Is Set To Decline Sharply In 2021', we expect the number of fallen angel downgrades in the U.S. and EMEA, and affected debt to decrease in 2021. The sharp decline in the number of potential fallen angels globally in recent months supports this view. Additionally, the negative bias (percent of issuers on negative outlook or CreditWatch) has continued to drop since mid-2020 for 'BBB-' issuers, as well as for the overall 'BBB' category.

Moreover, the share of CreditWatch negative placements among all potential fallen angels remains low at 3.6%, far below the 20%-25% last March to May, and even the 12.7% average in the 10 years leading into 2020. This points to less immediate downgrade risk and, potentially, a slower pace of new fallen angels in the near term. The estimated timeframe of a potential downgrade is typically within 90 days for a negative CreditWatch, compared with up to two years for a negative outlook on an investment-grade rating (see "Guide To Credit Rating Essentials, What Are They And How Do They Work?"). In other words, the longer horizon for a negative outlook potentially leaves more time for an issuer to recover from current challenges.

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However, there is still a concentration of potential fallen angels in some sectors. Financial institutions have the highest number of potential fallen angels, with 14. Many of these issuers face challenging operating conditions, or economic contraction in their regions because of the COVID-19 pandemic. These potential fallen angels include six non-operating holding companies from the U.S., the U.K., and Ireland, as well as a few nonbank financial institutions. However, we also note that the proportion of potential fallen angels as a share of the investment grade population for financial institutions is very low, on account of the sheer number of rated entities in that asset class.

The media and entertainment sector, which includes the lodging and leisure subsector, continues to lead the number of nonfinancial potential fallen angels, with 13. Issuers in the leisure and lodging subsector continue to struggle with low demand with the uneven rollout of vaccines across regions, as well as a slower return of more profitable group and business travel.

Real estate ranks second among nonfinancials, particularly commercial real estate as companies considering hybrid work arrangements, and traditional retail continues to struggle with both pandemic-related and structural changes.

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The Rising Stars Count As Of Q1 Has Already Surpassed Full-Year 2020

The nine rising stars as of March 31, have already surpassed 2020's full-year count of seven.

Two issuers had strong performances despite the pandemic; Advanced Micro Devices Inc. and Grupo Cementos de Chihuahua S.A.B. de C.V. Meanwhile, Triton International Ltd. saw its container leasing business rebound with trade demand. Another building materials firm, Smurfit Kappa Group PLC, was upgraded owing to its tighter financial policies leading to lower leverage.

The five remaining rising stars were all upgraded after being acquired by stronger entities, or merging with another into a new, stronger credit; WPX Energy Inc., Parsley Energy LLC, QEP Resources Inc., Fiat Chrysler Automobiles N.V., and Norbord Inc. More broadly, we expect merger and acquisition (M&A) activity to reach or exceed pre-pandemic levels in 2021, as stable sectors like technology, telecommunications, and health care seek growth opportunities, and more depressed sectors, including energy, potentially have M&A transactions for defensive reasons.

By geography, the U.S. leads the rising stars with five. By sector, building materials and oil and gas lead with three issuers each. The latter sector has benefited from a rebound in oil prices, which S&P Global Ratings has recognized in its revised oil price assumptions.

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Meanwhile, the count of potential rising stars (issuers with a 'BB+' rating and carrying a positive outlook or CreditWatch with positive implications) reached 14, with one addition and no removals. Volvo Car AB was added to rising stars in March after better-than-expected performance in 2020.

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Related Research

• Guide To Credit Rating Essentials, What Are They And How Do They Work?
• ‘BBB’ Pulse: Fallen Angel Downgrade Risk Is Set To Decline Sharply In 2021, April 15, 2021
• Ovintiv Inc. Outlook Revised To Stable From Negative On Improved Credit Measures; Ratings Affirmed, April 1, 2021
• BFA Tenedora de Acciones Downgraded To ‘BB+/B’ From ‘BBB-/A-3’ On Completed CaixaBank and Bankia Merger; Outlook Negative, March 31, 2021
• Triton International Ltd. Upgraded To ‘BBB-’ From ‘BB+’ On Improved Credit Quality; Outlook Stable, March 31, 2021
• Various Rating Actions Taken On Four Chilean Government-Related Entities On The Sovereign’s Downgrade, March 26, 2021
• Ally Financial Inc. Outlook Revised To Stable On Better-Than-Expected Financial Performance; Ratings Affirmed, March 26, 2021
• Discover Financial Services Outlook Revised To Stable From Negative On Stronger Loss Absorbency; ‘BBB-’ Rating Affirmed, March 26, 2021
• Synchrony Financial Outlook Revised To Stable From Negative As Consumer Creditworthiness Holds Up; Ratings Affirmed, March 26, 2021
• Hess Corp. Outlook Revised To Stable From Negative On Revised Oil Price Assumptions; Ratings Affirmed, March 23, 2021
• Austrian Commercial Real Estate Company Immofinanz Outlook Revised To Negative On Announced Takeover Offer For S-Immo, March 20, 2021
• SL Green Realty Corp. Outlook Revised To Negative On Short-Term Leverage Increase; Ratings Affirmed, March 19, 2021QEP Resources Inc. Rating Raised To ‘BBB-’ And Withdrawn On Close Of Acquisition By Diamondback Energy, March 19, 2021
• Grupo Cementos de Chihuahua Upgraded To ‘BBB-’ From ‘BB+’ On Steady Performance And Stronger Metrics; Outlook Stable, March 19, 2021
• Kohl's Corp. Outlook Revised To Stable From Negative On Better-Than-Expected Results; Ratings Affirmed, March 18, 2021
• Host Hotels & Resorts Inc. Issuer Credit Rating Lowered To ‘BB+’, Outlook Negative; Debt Rating Affirmed At ‘BBB-’, March 17, 2021
• Global Mining Services Provider Thiess Group Rating Lowered To ‘BB+’ On Parent Downgrade; Outlook Stable, March 10, 2021
• Car Manufacturer Volvo Car AB Outlook Revised To Positive On Resilient Cash Flow And Profitability; Affirmed at ‘BB+’, March 9, 2021
• Perrigo Co. PLC ‘BBB-’ Rating Affirmed On Generics Divestiture; Outlook Revised To Negative, March 4, 2021
• Timken Co. Outlook Revised To Stable On Stronger-Than-Expected Performance And Growth Opportunities; Rating Affirmed, March 4, 2021
• Suzano Outlook Revised To Stable From Negative On Likely Stronger Cash Generation Amid Higher Prices; Ratings Affirmed, March 3, 2021
• Lear Corp. Outlook Revised To Positive On Rebounding Profits, Cash Flow; Ratings Affirmed, March 2, 2021
• Ireland-Based Packaging Producer Smurfit Kappa Group Upgraded To ‘BBB-’ On Tighter Financial Policy; Outlook Stable, Feb. 24, 2021
• Advanced Micro Devices Inc. Upgraded To 'BBB-'; Ratings Remain On CreditWatch Positive, Feb. 23, 2021
• TechnipFMC PLC Downgraded To ‘BB+’ On Spin-Off Of Engineering And Construction Business, Outlook Negative, Feb. 18, 2021
• Hexcel Corp. Downgraded To ‘BB+’ On Continued Customer Destocking And Weak Margins, Outlook Negative, Feb. 6, 2021
• Norbord Inc. Upgraded To ‘BBB-’ From ‘BB’ On Acquisition By West Fraser Timber Co. Ltd.; Outlook Stable, Feb. 1, 2021
• Parsley Energy LLC. Issuer Credit Rating Raised To ‘BBB-’, Then Withdrawn On Close Of Acquisition By Pioneer, Jan. 14, 2021
• Fiat Chrysler Automobiles Upgraded To ‘BBB-’ On Merger With Peugeot; Outlook Stable, Jan. 9, 2021
• WPX Energy Inc. Issuer Credit Rating Raised To 'BBB-', Then Withdrawn On Close Of Acquisition By Devon Energy, Jan. 8, 2021