Key Takeaways

• The number of emerging market issuers rated 'CCC+' and lower slightly decreased to 22 as of Dec. 31, 2022, from 23 as of Sept. 30, 2022, which constitutes 13% of the speculative grade universe.
• The latter has progressively declined to 168 as of year-end 2022 from 210 at year-end 2021, mainly as a consequence of China-based rating withdrawals.
• Downward transition risk is moderating, with 36% of issuers rated 'CCC+' and lower on either a negative outlook or CreditWatch, with the highest concentration in the financial industry.
• Issuance was muted in 2022, with refinancing risk mostly concentrated in the utility industry and Latin America region, although the high interest rate environment is paving the way for more distressed exchanges over the coming quarters.

The number of emerging market issuers rated 'CCC+ and lower' decreased slightly to 22 in fourth-quarter 2022, from 23 in the third quarter (chart 1).   S&P Global Ratings downgraded Greater China-based consumer products company China Dili Group to 'CCC' from 'B-' on increased difficulty in accessing financing, while one rating was withdrawn (Central China Real Estate Ltd.), and one lowered to default (China-based property developer Greenland Holding Group Co. Ltd.), after a distressed exchange.

Issuers rated 'CCC+' and lower accounted for 13% of speculative-grade (SG) issuers as of Dec. 31, 2022, up from the 11% registered as of Dec. 31, 2021. This is the result of a progressive decrease in emerging market SG issuers, to 168 from 210 over the same period. Most of the decrease (62%) came from Greater China, which had 26 fewer issuers than the previous year as a consequence of many rating withdrawals following downgrades, especially within the real estate industry after strain on the Chinese property market throughout 2022.

Chart 1

Moreover, more than 75% of issuers rated 'CCC+' and lower at Dec. 31, 2021, remained within the 'CCC' bucket as of Dec. 31, 2022. This signals some risk crystallization in terms of distribution at the lower end of the rating universe and, therefore, persisting credit risk. In emerging markets, 82% of 'CCC+' and lower rated issuers are in Latin America.

The gap between 'CCC' negative bias and 'B-' negative bias widened to 25 percentage points in December 2022 (chart 2), broadly in line with the average since 2017. This signals that default is the most prominent risk to monitor regarding downward rating transitions from the 'B' category to the 'CCC' one. Specifically, distressed exchanges were the cause of 62% of emerging market defaults in 2021-2022, compared with 41% in 2019-2020 (chart 3). Nonetheless, downward transition risk is moderating, with negative bias decreasing to 36% in fourth-quarter 2022 from 41% in the third quarter, well below historical peaks seen in first-half 2020.

Chart 2

Chart 3

Focusing on the industry distribution of issuers rated 'CCC+' and lower with a negative outlook or CreditWatch, we observe that credit rating risk has reshuffled compared with December 2021 (chart 4). Notably, the financial industry is currently more exposed, while utilities and real estate issuers were one year ago. In particular, we revised the outlook on Banco De Galicia Y Buenos Aires S.A.U. to negative in the fourth quarter as a result of the same action on Argentina, given the concentration in the sovereign's peso-denominated debt profile; Mexarrend S.A.P.I. de C.V. remained on CreditWatch negative on pressured liquidity; and Colombia's Credivalores - Crediservicios SAS was assigned a negative outlook because of its weak funding profile that could erode liquidity because of upcoming debt maturities. (Mexarrend was subsequently downgraded to 'D' on failure to make debt payment on Jan. 20, 2023. The default will be reflected in our next edition of EM Risk Credits.)

Chart 4

The aggregate debt represented by issuers rated 'CCC+' and lower dropped to $16 billion in fourth-quarter 2022 from $17.1 billion in the third quarter.   The country with the highest concentration of debt is Argentina with $7 billion, but Brazil displays the highest risk, with the rating on telecom company Oi S.A., which has $2.5 billion of debt, placed on negative outlook. Industry-wise, utilities account for $6.9 billion of debt, followed by oil and gas with $3.2 billion, both on positive outlook/Watch Pos (chart 5).

Issuance has been modest throughout the year in emerging markets (chart 6), especially at the lower end of the rated spectrum.   Issuance by SG issuers in 2022 totaled $5 billion, a marked drop versus average issuance of $46 billion in 2019-2021. In fact, U.S. dollar issuance collapsed to 10% of that observed in 2019-2021, confirming strong dollar concerns as a looming downside risk for 2023, despite some respite in the past few months (see our latest EM Monthly publication "Emerging Markets Monthly Highlights: Some Good News, Uncertainty Lingers" published Jan. 19, 2023). Emerging market 'CCC+' and lower rated companies did not issue any debt in 2022.

Chart 5

Chart 6

In addition, the debt of 57% of emerging market companies rated 'CCC+' and lower is expected to mature over 2023-2025 (charts 7-8). Precisely, $3.5 billion of debt will mature through 2024, mainly from utilities in South Africa (ESKOM Holdings SOC Ltd.) and Argentina (Pampa Energia S.A. and Capex S.A.). With high interest rates still in place, and a limited appetite from investors for risky credits, refinancing risk will be an issue for these companies if their strategy is to rollover their debt within the year.

Chart 7

Chart 8

Although 2023 has started with significant uncertainty, financials still look appropriate for the low rating category across asset classes, with debt forecast to decrease over time as a percentage of EBITDA (chart 9) and interest coverage still looking comfortable across industries (chart 10), with the exception of the chemical company Grupo Idesa S.A. de C.V., utility Empresa Distribuidora Y Comercializadora Norte S.A., and telco Oi S.A., whose interest coverage ratio is lower than 1x over 2022-2023.

Chart 9

Chart 10

Table 1

Emerging markets consist of Latin America: Argentina, Brazil, Chile, Colombia, Peru, Mexico; Emerging Asia: India, Indonesia, Malaysia, Thailand, Philippines, Vietnam; EMEA: Poland, Saudi Arabia, South Africa, Turkey; Greater China: China, Hong Kong, Macau, Taiwan, and red chip companies (issuers headquartered in Greater China but incorporated elsewhere).

Glossary And Abbreviations

Negative bias: Percentage of issuers with a negative outlook or on CreditWatch negative.

Related Research

• Emerging Markets Monthly Highlights: Another Tough Year Ahead, Dec. 15, 2022
• Global Credit Outlook 2023: No Easy Way Out, Dec. 1, 2022
• Risky Credits: In Emerging Markets, Downward Rating Transitions Prevail, Nov. 22, 2022

Related Rating Actions

• Central China Real Estate 'CCC-' Rating Withdrawn At The Company's Request, Dec. 16, 2022
• Outlook On Two Argentine Banks Revised To Negative From Stable On Sovereign Rating Action, Ratings Affirmed, Nov .17, 2022
• Mexarrend 'CCC+' And 'mxB-/mxB' Ratings Remain On CreditWatch Negative, Reflecting Tight Liquidity, Nov. 17, 2022
• China Dili Downgraded To 'CCC' From 'B-' On Increased Difficulty In Accessing Financing; Outlook Negative, Nov. 2, 2022
• Argentine Utility Edenor Ratings Raised To 'CCC+' From 'CCC-' On Debt Repayment, Outlook Negative, Nov. 2, 2022
• Credivalores 'CCC+' Ratings Affirmed And Off CreditWatch Negative On Easing Refinancing Pressures, Outlook Negative, Nov. 1, 2022