Challenges are piling up for both global economies and markets. Inflation has been rising persistently in many major economies, pushing many central banks to accelerate interest rate hikes, resulting in sharply tighter financing conditions (as demonstrated by yields for non-financials excluding utilities and telecoms, see chart 1) and questions about the possibility of a regional or global recession. There is increasing rating pressure, particularly at the lower end of the credit spectrum, which may spread to higher categories depending upon the length and severity of any credit downturn.

Chart 1

Global Risks Have Yet To Dent Ratings Stability in the 'BBB' Space

These economic and market challenges hadn't, as of end August, affected overall rating trends at the cusp of investment-grade, though S&P Global Ratings notes that credit conditions have since weakened. Operating performance in many sectors continue to show post-pandemic normalization of revenue, profitability, and debt metrics, while other ratings improvements reflect prudent financial policies. Negative bias (the share of issuers on negative outlook or CreditWatch) for 'BBB-' issuers has improved during 2022 , while positive bias (the share of issuers on positive outlook or CreditWatch) for 'BB+' issuers has been rising.

Chart 2

Despite increasing credit headwinds, rising stars (issuers upgraded to investment grade, 'BBB-' or above, from speculative grade, 'BB+' or below) were, as of Aug. 31, 2022, on track to outpace fallen angels (issuers downgraded to speculative grade from investment grade) for the second straight year, both in terms of number of issuers and debt amounts. In fact, since the end of May, there were five new rising stars versus only two new fallen angels. In August alone, there were two rising stars and no fallen angels.

Chart 3

The Pipelines Of Fallen Angels And Rising Stars Suggest Rating Stability, For Now

The number of potential fallen angels has remained at 31, since the end of May, with additions consistently matched by removals. In August, one issuer was added to the list and one was removed after its outlook was revised to stable. Within the 31 potential fallen angels, the number of CreditWatch negative placements has risen to four, which is still well below the double-digit figures that were typical in 2020.

Chart 4

Table 1

The number of potential rising stars fell to 28 by the end of August, down from an all-time high of 37 in October 2021. Nonetheless, the count is still at historically elevated levels and most of the removals have been due to issuers becoming actual rising stars, rather than the loss of a positive outlook or CreditWatch.

Chart 5

Table 2

Sectoral Breakdowns Hint At Potential Difficulties To Come

Even though overall 'BBB' credit trends currently display resilience, the sectoral breakdown of potential fallen angels may highlight increasing credit risks. Among nonfinancials the sectors with the most potential fallen angels are consumer products, real estate, and utilities. This could reflect the impact of high input price inflation on margins, and in the case of consumer products and real estate, may also partly reflect a decline in demand due to rapid rate increases. Neither headwind is likely to dissipate in the near term, potentially leading to further pressure.

Chart 6

Chart 7

Potential rising stars, outside of the financial sector, are concentrated in media and entertainment (including hotels and leisure) and autos, which are benefiting from post-pandemic pent-up demand. We question how long that elevated demand will last as the cost of living rises sharply in many regions and global recession risks increase.

Appendix

Definitions:

Fallen angels are defined as previously investment-grade issuers with bonds outstanding that have been downgraded into speculative grade, (i.e., to 'BB+' or below from 'BBB-' or above. Potential fallen angels are defined as issuers rated 'BBB-' by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications and which currently have bonds outstanding.

Rising stars are defined as previously speculative-grade issuers with bonds outstanding that have been upgraded into investment grade (i.e. to 'BBB-' and above from 'BB+' and below,). Potential rising stars are defined as issuers rated 'BB+' by S&P Global Ratings with positive outlooks or ratings on CreditWatch with positive implications, and which currently have bonds outstanding.

All four of the above definitions include all rated issuers with valid outstanding debt at the time of the rating action. Valid debt includes issuer-level debt (both secured and unsecured), bank loans, subordinated debt, medium-term notes, preferred stock, convertible debt, and drawdowns under MTN programs and excludes commercial paper (CP) programs, shelf registrations, certificates of deposit, and debt rated on a confidential basis. Moreover, if a subsidiary's parent is itself a fallen angel, rising star, potential fallen angel, or potential rising star, only the parent is counted in the list.

Table 3

Table 4

Table 5

Table 6

Related Research

• FirstGroup Outlook Revised To Stable On Solid Operating Performance; 'BBB-' Ratings Affirmed, Aug. 30, 2022
• Sagicor Financial Co. Outlook Revised To Positive From Stable On Proposed Acquisition Of ivari, 'BB+' Ratings Affirmed, Aug 26, 2022
• American Family Mutual Rating Lowered To 'A-' From Underwriting And Investment Challenges; Outlook Negative, Aug 25, 2022
• DCP Midstream L.P. Upgraded To 'BBB-' On Record Second-Quarter Earnings; Outlook Stable, Aug 11, 2022
• Eutelsat Communications 'BBB-/A-3' Ratings Placed On CreditWatch Negative On OneWeb All-Share Combination, Aug 05, 2022
• T-Mobile US Inc. Ratings Raised To 'BBB-' From 'BB+', Off CreditWatch; Outlook Positive; Sprint 'BB+' Ratings Affirmed, Aug 05, 2022