The winners and losers in the virus crisis are becoming clearer. China reports a strong economic rebound while Western economies continue to struggle. Hotels and airlines fight for their survival while online fulfilment and delivery logistics firms cannot hire staff quickly enough. And real estate is seeing a “race for space” in residential markets, but serious viability issues in some commercial lines – Bloomberg report that Land Securities will sell a quarter of their total portfolio, mainly lightening up on retail and leisure.
Credit Benchmark have released the October Credit Consensus Indicators (CCIs). The CCI is an index of forward-looking credit opinions for US, UK and EU Industrials based on the consensus views of over 30,000 credit analysts at 40 of the world’s leading financial institutions.
Retail sales may be rising, even if the pace in August was lower than anticipated, but retailers themselves continue to struggle. The number of store closings in the US has remained higher than openings most weeks, bankruptcies are at a notable high and there’s potential for more in the months ahead, including many well-known brands.
Leveraged Loans continue to divide investor opinion. Values declined as part of the High Yield rout earlier this year, but they have been slower to recover. Winnie Cisar, Head of Credit Strategy at Wells Fargo points to a simple lack of liquidity, which is only now filtering back into the Leveraged Loan space with prices closing the gap vs. general High Yield.
Amid an onslaught of negative credit news, there are some bright spots. So-called Rising Stars, sectors whose credit quality has moved from high-yield or “junk” status to investment-grade, are growing, slowly but surely.
Fallen Angels – companies whose credit quality has shifted from investment-grade to high-yield or “junk” status – continue to grow in number but at a slower pace than what we’ve been seeing for the past several months.
With emergency government funding set to expire at the end of September, US Airlines are planning mass layoffs after a more than 80% collapse in revenues. The more cash rich carriers – such as SouthWest and Delta – have avoided Federal loans so far, hoping to tough it out until a vaccine arrives, with the prospect of a large increase in market shares for the survivors.
The besieged US energy sector continues to see credit deterioration, and with a multitude of problems facing the industry there is little cause for optimism. In the US, energy companies were supplying fewer barrels of gas per day even with the recovery in consumption, and shale producers are facing a cash crunch. Meanwhile, European oil producers are questioning whether it’s worth drilling.
With the economic picture still murky, no news may be good news for the US and UK housing sectors. Credit quality has seen little change in each region with the most recent update. Recent positive signs in the US and UK markets may suggest continued stabilization. But as noted last month, the UK is experiencing its worst recession on record and the sector’s credit prospects may limited for some time. There’s more reason for optimism for the US, according to some reports.
Credit Benchmark have released the September Credit Consensus Indicators (CCIs). The CCI is an index of forward-looking credit opinions for US, UK and EU Industrials based on the consensus views of over 30,000 credit analysts at 40 of the world’s leading financial institutions. The CCI tracks the total number of upgrades and downgrades made each month by credit analysts to chart the long-term trend in analyst sentiment for industrials.
Except for a few lonesome doves, general retailers in the US continue to struggle. Sales have returned to pre-pandemic levels, but the composition is different and recent sales recoveries were lower than anticipated. Consumer spending increases have been moderate. Something similar can be said for UK retail and for UK consumer spending. COVID-19 remains an issue for each country.
Equity markets used to ignore credit risk, but COVID has changed all that. There is a growing demand to understand corporate and financial credit risk at all levels, from single issuers and corporate families to sectors, industries and countries. How far do equity market movements reflect credit developments during the COVID crisis?
With rising infection rates and concerns about the looming virus season, the COVID crisis is clearly far from over. But with the first wave behind us, it is possible to see the past six months of market volatility in its broader context. The S&P500 is now higher than it was in February 2020, having at one stage lost one third of its value. The VIX spiked from a mid-February level of 14% to a mid-March high of 85%, and currently trades at 33%. The Global BBB spread\[1\] tripled from 1.5% to 4.5% and currently sits at 1.7%.
While there are some signs the US auto industry is restarting after COVID, numerous challenges remain – and that’s not even factoring in overall weakness in the economy and personal finances. Credit weakness continues, and it’s unlikely to get much better until everything else improves. Similar can be said about the UK, where car sales are on the rise but where the economy is coming off its worst drop on record.
Problems for the beleaguered US energy sector have continued to mount this year. Demand for oil plummeted, bringing down prices as competition and supplies grew. Bankruptcies continue in the industry as the broad economy continues to struggle, and it’s not clear how many firms will benefit from any improvement in prices.
The ranks of the Fallen Angels – firms whose credit quality has made the shift from investment-grade to high yield, or “junk” status – continue to grow, but the pace may be slowing down. Consensus credit data from Credit Benchmark – which gathers the collective credit quality estimates of lenders to these firms – shows that a growing number of companies have now entered the Fallen Angel category.
In the Ernest Hemingway novel The Sun Also Rises, Mike is asked how he went bankrupt. “Two ways,” he answers. “Gradually, then suddenly.” COVID-19 seems to have rewritten the financial rules: Central Banks are pushing interest rates further into negative territory and Government support for businesses and their employees has pushed Sovereign debt to levels not seen since the Second World War.
The US housing sector can breathe a (perhaps temporary) sigh of relief. The UK housing sector, however, may be taking a turn for the worse, with credit quality diminishing. There have been some positive signs in recent weeks, like rising sales, increased construction, and regulatory changes that allow for more construction. But with the UK experiencing the worst recession on record, this sector’s credit prospects may be restrained for some time.
The August CCIs have seen significant further credit deterioration for UK, EU and US Industrial companies. Credit quality continues to worsen month-on-month for UK Industrial companies, with a third consecutive month of decline. The CCI jumped down several points to register at 40.9 this month, down from 44.2 last month.
COVID-19 has caused major economic damage, especially in sectors connected with travel and leisure. But in manufacturing and technology there will be some strong winners: increased factory automation, major house-building and property conversion programs, increased demand for private cars, new software to facilitate social distancing in a broad range of situations, and major supply chain restructuring.