Stability remained the watchword for rating trends at the cusp of investment grade over October, as they continued to resist growing economic and financial pressures. Two issuers over the month joined S&P Global Ratings' ranks of rising stars (issuers upgraded to investment grade, 'BBB-' or above, from speculative grade, 'BB+' or below), while a further two became fallen angels (issuers downgraded to speculative grade from investment grade).

Expectations of a shallow recession in the U.S. in the first half of 2023 and slow growth for the U.S. and eurozone thereafter have not yet led to a significant increase in fallen angels. Moreover, the number of fallen angels as a percentage of investment-grade issuers is still far below its long-term average (see chart 1).

It is uncertain if that calm will last. In our report "'BBB' Pulse: Five Things To Watch As Recession Risks Mount," published on Nov. 16, 2022, we forecast that the volume of debt outstanding that is associated with fallen angels will rise by 22% over the next 12 months. Yet, we also noted that issuers in the 'BBB' category are confronting recessionary conditions from a position of relative strength, with the negative rating bias among 'BBB' issuers at a record low of 9%.

Chart 1

The number of new fallen angels and rising stars matched each other in October (see chart 2). Year to date saw 23 fallen angels, compared with 25 rising stars, with the former gradually closing the gap with the latter (see chart 3).

Chart 2

Chart 3

Most fallen angel downgrades over 2022 were only one notch, belying a lack of drastic changes in rating profiles. Russian issuers were the exception to that rule, with many downgraded by multiple notches before our ratings were withdrawn at the onset of the Russia-Ukraine conflict (see chart 4). Outside of that group, only three of 11 issuers were downgraded by more than one notch, and two of those were the result of an issuer being acquired by a lower-rated entity. That result underscores the stability of investment-grade credits, even at the lower end of the spectrum.

Chart 4

Potential Fallen Angel Numbers Are Stable

Current ratings do not yet suggest we are facing a meaningful acceleration in downgrades, with the number of potential fallen angels (issuers rated 'BBB-' with a negative outlook or CreditWatch placement) little changed over October. The pervading economic and financial risks appear to be only very gradually making themselves apparent in potential fallen angel trends, leaving the number of issuers falling into the category largely flat over the past half year (see chart 5), compared with a previously substantial decline in numbers tallied since mid-2020. The number of potential rising stars (issuers rated 'BB+' with a positive outlook or CreditWatch) is also gradually declining, while the positive bias in the 'BB-' category has decreased in recent months.

Chart 5

Moderate monthly movements in fallen angels and rising stars, as well as in the numbers of potential additions to both lists, have reflected the recent stability of the categories.

Table 1

Table 2

This ratings stability also shows up in the number of potential fallen angels placed on CreditWatch with negative implications, which declined to two from four (see chart 6).

Chart 6

Sectoral Breakdowns Highlight Pockets Of Vulnerability

While overall 'BBB' credit trends suggest resilience, the sectoral breakdown of potential fallen angels highlights where economic and financial market risks could weigh on issuers' credit metrics. Excluding financial institutions, the sectors with the most potential fallen angels are real estate, consumer products, and utilities (see chart 7). This may reflect the impact of higher input prices on margins and, in the case of consumer products and real estate, declining demand due to rapid interest rate increases. Neither of those headwinds have eased in recent months, meaning there remains scope for further pressure on issuer creditworthiness.

Chart 7

Potential rising stars, outside of the financial sector, are concentrated in the media and entertainment (including hotels and leisure) and autos sectors, which have benefited from pent-up demand as the pandemic waned (see chart 8). We question how long that elevated demand will last, particularly given a sharp rise in the cost of living in many regions and the increasing risk of a global recession.

Chart 8

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

• Credit Trends: Risky Credits: North America's 'CCC+' And Below Rated Debt Reaches $230 Billion, Nov. 23, 2022
• Risky Credits: In Emerging Markets, Downward Rating Transitions Prevail, Nov. 22, 2022
• Five Things To Watch As Recession Risks Mount, Nov. 16, 2022
• Default, Transition, and Recovery: Weakest Links Rise, Signaling Defaults Ahead, Nov. 15, 2022
• Default, Transition, and Recovery: Europe And Emerging Markets Are Default Hotspots, Nov. 10, 2022
• Credit Trends: Inflationary Pressures Influenced Half Of Potential Downgrades In September, Nov 08, 2022
• Default, Transition, and Recovery: The U.S. Distress Ratio Jumps Back Above Its Five-Year Average, Nov. 04, 2022
• Credit Trends: Risky Credits: The Respite In Europe May Be Short-Lived, Nov. 03, 2022
• EP Infrastructure 'BBB-' Ratings Affirmed And Removed From CreditWatch On Solid Group Performance; Outlook Negative, Oct. 26, 2022
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• Tesla Inc. Upgraded To 'BBB' From 'BB+' On Improving Production And Solid Cash Flow Prospects; Outlook Stable, Oct. 06, 2022