Fitch expects fewer downgrades globally during post lockdown ratings review cycle

June 30, 2021 (MLN): Fitch Ratings in its special report released on Tuesday expects fewer downgrades globally during the post-lockdown ratings review cycle than at the beginning of the crisis, provided there are no significant extensions of pandemic-related restrictions or new waves of coronavirus infections.

“The coronavirus pandemic and ensuing economic downturn have created substantial credit pressures in our rated sector portfolios, as signaled by downgrades, revisions of Rating Outlooks to Negative (RON) or placing issuers on Rating Watch Negative (RWN).” Fitch report said.

Fitch recently analyzed negative signal trends among corporates, financial institutions (FIs), sovereigns, and international public finance (IPF) entities during the coronavirus crisis to end-April 2021 and compared these trends with those seen during the global financial crisis.

The report noted that the conversion rates of RON and RWN to downgrades fluctuate during periods of economic crisis. The highest conversion rates (80%-90%) are typically seen at the beginning of a crisis, followed by periods of lower conversion rates (20%-30%), before returning to cycle-average ranges close to 50%.

The FI portfolio had the highest share of ratings on RON and RWN in the sample, mainly reflecting sovereign-related actions and downgrades taken on corporate parents as well as standalone credit weaknesses. This was followed by the sovereign sector.

Corporate negative signals peaked in June 2020 and have been declining since. Only three industries (leisure, transport, and aerospace) remain at higher risk of downgrades due to the pandemic, representing only 5% of Fitch-rated corporate debt. The IPF sector has seen the lowest number of negative signals, with many related to sovereign ratings, the report said.

The share of issuers on RON and RWN remains higher in all sectors relative to the levels seen before the pandemic, although there is a clear trend of ratings stabilization, it added.

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