S&P Global Ratings downgraded just 22 European companies in the first quarter of 2021--just more than half the number of downgrades in the fourth quarter of 2020 and down from a peak of 149 in second-quarter 2020, when the economic fallout from the COVID-19 pandemic brought swift credit deterioration. Meanwhile, we upgraded 21 European companies in the first quarter, up from 15 in the final quarter of 2020 and a significant increase from just two upgrades in the second quarter of 2020. The downgrade ratio (the proportion of downgrades among all rating actions) fell to 51% in the first quarter (see table 1), down significantly from the peak of 99% in second-quarter 2020.

However, the number of defaults remained elevated at eight in the first quarter--nevertheless an improvement from a high of 13 in both the third and fourth quarters of 2020. One of these defaults came from an investment-grade (rated 'BBB-' or higher) entity in the oil and gas sector, due to a missed principal payment. The remaining defaults were all from speculative-grade (rated 'BB+' or lower) entities and concentrated in the automotive, airline, and consumer goods sectors. Distressed exchanges were the most common reason for defaults in the first quarter.

Chart 1

The European 12-month trailing speculative-grade default rate rose to 6.1% as of March 31, 2021 (see chart 2). Meanwhile, weakest links (issuers rated 'B-' or lower with negative outlooks or ratings on CreditWatch with negative implications) in Europe have steadily fallen, dropping to 72 in the first quarter after peaking in the second quarter of 2020 at 106, though they remain well above pre-pandemic levels.

Chart 2

The negative bias (the proportion of issuers with negative rating outlooks or ratings on CreditWatch with negative implications) in Europe improved to 29% in the first quarter of 2021 from 35% in the fourth quarter of 2020. Negative bias has been higher among lower-rated issuers: European corporate speculative-grade issuers had a negative bias of 34% in the first quarter, well above the historical average of 23%. Among investment-grade-rated companies, the negative bias was about 23% in the first quarter, just above the historical average of 20%.

Table 1

Rating Actions: A Shift In Sector Performance

The concentration of downgrades by sector has shifted since the peak of the pandemic. The oil and gas sector accounted for the greatest portion in the first quarter of 2021, at 23% (see chart 3).

In the second quarter of 2020, the media and entertainment sector accounted for 18% of the 149 total downgrades. The consumer products sector followed with 9% of the total.

Chart 3

Ratings Bias: Credit Outlooks Remain Negative

The net ratings bias (the positive bias, or the proportion of issuers with positive rating outlooks or ratings on CreditWatch positive, minus the negative bias) for European corporate entities narrowed to negative 23.4% in the first quarter of 2021, an improvement from negative 36.1% in the second quarter of 2020 (see chart 4). However, the measure remains weaker than pre-pandemic levels. The net bias has improved for both financial and nonfinancial sectors since the second quarter of 2020, but the credit outlooks for many sectors remain highly negative based on net bias--at most, perhaps showing a budding recovery.

Chart 4

While the overall negative bias for European corporate entities has improved since hitting a high of 36.1% in the second quarter of 2020, the measure remains well above pre-pandemic levels. Conversely, the positive bias has widened since the second quarter of 2020, to 5.2% from 3.1%.

Chart 5

Chart 6

Chart 7

Performance Continues To Diverge Among Sectors And Countries

Performance continued to diverge between financial and nonfinancial issuers across Europe in the first quarter. The financial institutions sector's negative bias remains relatively elevated at 33% (see chart 8), but negative bias is even higher in some nonfinancial sectors. The media and entertainment sector reported the highest negative bias, at 55%, followed closely by transportation at 54%. A handful of sectors that currently have some of the highest negative biases--specifically, shipping within the transportation sector, the technology sector, and the automotive sector--are expected to recover pre-pandemic credit metrics in 2022.

Chart 8

Among European countries with five or more rated corporate issuers, Spain had the highest corporate negative bias, at 45%, at the end of the first quarter of 2021 (see chart 9). Spain experienced a wave of COVID-19 infections at the beginning of the year, coupled with a slow rollout of the vaccine. Some recovery is expected for the country in the second half of the year. Meanwhile the U.K., which accounts for almost 20% of all rated European corporate issuers, also maintained elevated negative bias due to a wave of new COVID-19 variants and subsequent economic lockdown throughout the quarter.

Apart from Spain and the U.K., the European countries with 50 or more rated corporate issuers exhibited elevated stability rates (the share of ratings that did not change rating categories) in the first quarter as recovery continues to diverge across Europe.

Chart 9

Negative bias has historically remained high among lower-rated issuers. Among investment-grade rating categories, negative bias in the first quarter of 2021 remained below 40% (see chart 10). Speculative-grade rating categories have historically exhibited higher negative bias, and the same was true in the opening quarter of 2021: Among issuers rated 'B-' to 'BB+', negative bias held below 50%. However, issuers rated 'CCC+' and below maintained negative ratings bias of 60% and above. The 'CCC-' and 'CC' ratings reported 100% negative bias.

Chart 10

Appendix

Table 2

Table 3

Related Research

• The European Speculative-Grade Corporate Default Rate Could Fall To 5.25% By March 2022, May 26, 2021
• Despite A Pickup In Positive Rating Actions, The Weakest Links Tally Remains High, May 6, 2021
• European Economic Snapshots: Unlike The Rest Of Europe, The U.K. Is Looking Beyond COVID-19, April 28, 2021
• EU's Vaccine Supply Boost Will Aid The Race Against COVID Mutations, April 28, 2021
• 'BBB' Pulse: Fallen Angel Downgrade Risk Is Set To Decline Sharply In 2021, April 14, 2021
• Credit Conditions Europe Q2 2021: New Horizons, Old Risks, March 31, 2021
• COVID-19 Heat Map: Some Bright Spots In Recovery Amid Signs Of Stability, Feb. 17, 2021