January 12, 2024 (MLN): Global credit metrics are generally expected to be stable to improve this year, even with sharply lower economic growth, with most issuers’ leverage expected to be below our negative rating sensitivity, says Fitch Ratings.

However, Fitch expects revenue, margin and leverage trends to differ across regions and default rates among lower-quality, speculative-grade issuers to rise due to deteriorating economic conditions and the pressure of high interest rates.

Fitch recently published the fifth edition of its quarterly Global Corporates Macro and Sector (GxO) Forecast data file, which aggregates key inputs used in our corporate credit analysis including its latest macroeconomic outlook, commodity price assumptions and default rate forecasts.

New to this quarter’s edition is a synopsis of our 2024 sector outlooks, key performance indicators through 2025, and sector-level forecasts through 2025.

Aggregate EBITDA leverage is projected to be slightly lower at 2.7x in 2024 compared with 2.8x for 2023 for our global portfolio.

Leverage is expected to decline in North America, led by Media & Entertainment and Aerospace & Defense, and in APAC, led by Gaming, Lodging & Leisure and Chemical.

Conversely, the credit rating agency expects a slight year-over-year increase in leverage for EMEA, led by Natural Resources, and for LATAM led by Oil & Gas. Forecasts are largely unchanged since June 2023.

Slightly higher aggregate debt for our global portfolio in 2024 is expected to be offset by improved top-line performance, modestly higher profitability due to disinflation, and revenue and cash flow growth.

Revenue growth is projected to increase 1.8% in 2024, after declining 1.7% in 2023.

The recovery is expected to lag in EMEA due to stagnant economic activity and to be the strongest in APAC even as the property sector continues to struggle.

The aggregate global portfolio EBITDA margin is projected to expand to 17.7% in 2024, from 17.4% in 2023, with flat-to-higher margins in all regions except LATAM, due largely to Oil and Gas profitability normalizing.

Margin expansion expectations have been lowered over the past six months even as revenue growth forecasts were revised higher.

Credit trends for high-yield (HY) and investment-grade issuers are expected to demonstrate similar 2024 trajectories for revenue, margins, and leverage.

However, HY issuers continue to be more adversely affected by high-interest rates as aggregate interest coverage globally is projected to decline to 4.1x in 2024 from 4.2x in 2023 and 5.5x in 2022.

Conversely, for investment-grade companies we expect coverage to be 10x in 2024, up from 9.8x in 2023 but down from 12.1x in 2022, due partly to higher cash interest income and less variable-rate debt.

Coverage is expected to be flat at 8.2x for our entire global portfolio in 2024 after declining from 10.2x in 2022.

U.S. and European leveraged loan (LL) and HY bond default rates are expected to increase in 2024. Our LL default rate forecast is 3.5%-4.5% in the U.S. and 4.0% in Europe, while our HY default rate forecast is 5.0%-5.5% in the U.S. and 4.0% in Europe.

The overall credit outlook for global corporates is neutral, but our 2024 outlooks for U.S. and EMEA leveraged finance are deteriorating in part due to our expectation of higher year-over-year default rates.

Key performance indicator (KPI) assumptions are important inputs for sector analysis and are reviewed quarterly.

Notable changes in December include raising our global new vehicle sales figure for 2024 to 89.8 million versus 85.5m and lowering retail sales KPIs in the U.S., EMEA, and APAC.

Fitch also reduced our expectation for U.S. housing starts to 4% from down 2% and significantly raised our expectations for power production for Brazilian and Mexican utilities.

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Posted on: 2024-01-12T11:44:43+05:00