(Editor's Note: This research roundup features a curated compilation of the key takeaways from our most up-to-date thought leadership. This edition has been updated from the last roundup on March 20, 2024.)
In this edition of Instant Insights, our key takeaways from recent articles include the following: regional credit conditions covering Asia-Pacific, emerging markets, Europe, and North America, economic outlooks for Asia-Pacific, emerging markets, Eurozone, the U.S., the U.K., and Canada, the commercial real estate risk for U.S. regional banks, and credit implications of the Francis Scott Key Bridge collapse on public finance entities. We dive into global shadow banks, e-fuels, green growth, the German chemical industry, beverage companies in the U.S., North American midstream energy companies, China's listed toll-road operators, retail property in Hong Kong, performance of the riskiest credits, debt restructurings in Europe, loan pricing in secondary markets, banks in Mexico, France and GCC, and the "white list" program, LRGs and LGFVs in China. We also feature 2023 annual default and rating transition studies on corporates, public finance and structured finance for Japan and Taiwan, Real Estate Monitor, fiber project financing in Europe, takeaways from CERAWeek 2024, ESG In Credit Ratings, European ABS and RMBS, bridging loan RMBS in the U.K., U.S. structured finance chartbook, the sector intelligence report on European leveraged finance, Australian RMBS and covered bonds, the effects of a sharp price dip in Altice France's bonds on European CLOs, and the impact of asset diversification on CLO performance.
Key Takeaways
- Asia-Pacific credit conditions are steadying. We believe the region can stay on its growth path for the next two years, thanks to strong domestic consumption and increasing trade flows. But a drag to momentum could come from China's ongoing property challenges, normalization of Japan's monetary policy, and adverse geopolitical developments.
- Credit quality in Europe appears to stabilize on the back of a more robust macroeconomic outlook and easing financing conditions. The main risk that could derail our base-case expectations is increasing geopolitical fragmentation.
- As the year progresses, North American credit conditions could brighten somewhat, especially if the U.S. economy settles into a soft landing and the Federal Reserve eases monetary policy in an orderly fashion. High financing costs and input-price pressures remain persistent risks.
- Expected soft landing of advanced economies will continue supporting credit conditions in emerging markets (EMs), risks are receding to a certain degree, but the long-term outlook remains challenging.
S&P Global Ratings periodically updates this article, which contains an edited compilation of key takeaways from our most up-to-date thought leadership organized by sector, region/country, and publication date (see table 1).
Table 1
Key Takeaways From Our Most Recent Reports
Credit conditions
1. Credit Conditions Asia-Pacific Q2 2024: A Delicate Balance, March 27, 2024
Eunice Tan, Singapore, +65-6530-6418, eunice.tan@spglobal.com
- Stable growth: Strong domestic consumption and increasing trade flows for much of Asia-Pacific will help keep the region's growth on track, at 4.4% for 2024 and 4.6% for 2025. But we believe China's ongoing property woes and Japan's monetary policy normalization could dampen the growth momentum and hurt credit.
- Improving financing conditions: A stable economic outlook and easing monetary policies should support financing conditions, and that's prompted us to revise our financing risk trend assessment to improving. However, high rates compared with the pre-COVID era will exacerbate borrowers' debt-servicing burdens, especially for those that are highly indebted with impending financing needs. The risk level remains high.
- Easing recessionary and inflationary fears: A soft economic landing in the U.S., buoyed by robust labor markets and services sectors, could subdue risks around weak demand and exports. Producers are still able to pass-through high costs to consumers, lessening margin compression. Thus, we have lowered the risk level to elevated for the economic landing and high prices.
- Risks to outlook: Asia-Pacific's top risk remains China's property challenges and their impact on spending by households and businesses. Intensifying geopolitical tensions could hurt business confidence and expose the region to energy shocks (e.g., from a widening Middle East conflict).
2. Credit Conditions Emerging Markets Q2 2024: Unmet Expectations Could Heighten Risks, March 27, 2024
Jose M Perez-Gorozpe, Madrid, +34-914-233-212, jose.perez-gorozpe@spglobal.com
- Expected soft landing of advanced economies will continue supporting credit conditions in emerging markets (EMs), risks are receding to a certain degree, but the long-term outlook remains challenging.
- Risk trends for EMs have eased as major economies follow a soft-landing trajectory and financing conditions improve.
- We expect that the soft-landing economic trajectory, along with market optimism, will continue to stabilize rating trends across EMs.
3. Credit Conditions Europe Q2 2024: Credit Heals, Defense Shields, March 27, 2024
Paul Watters, CFA, London, +44-20-7176-3542, paul.watters@spglobal.com
- Overall: Our base case centers on a soft landing in 2024. Labor markets will remain tight, while disinflation will continue, enabling the European Central Bank (ECB) to cut rates by 25 basis points (bps) three times in the second half of 2024. Ageing populations, low productivity growth, and questions about the full deployment of the NextGenerationEU program will likely hamper the economic rebound over 2025-2026.
- Risks: The main risks for Europe are regional geopolitical conflicts which could spread across borders. Beyond that, protectionism represents an increasing threat to European trade. Many fixed-rate borrowers remain exposed to higher refinancing costs, especially if rate cuts are deferred and bond yields are back up. After a turbulent couple of years, we now view an extended period of slow economic growth as the main macroeconomic downside risk.
- Ratings: Credit quality is stabilizing on the back of a more robust macroeconomic outlook and easing financing conditions. Pockets of risk will remain as the lagged effect of inflation and higher rates feed through to asset quality. Credit losses within the banking sector will likely normalize from a low level, while a few negative rating actions could emerge in residential mortgage-backed securities (RMBS) and auto asset-based securities (ABS). For corporates, stress will be largely contained to 'CCC' rated borrowers, with defaults amounting to about 3.5% at year-end 2024.
4. Credit Conditions North America Q2 2024: Soft Landing, Lurking Risks, March 27, 2024
David Tesher, New York, +1-212-438-2618, david.tesher@spglobal.com
- Overall: As the year progresses, credit conditions could brighten somewhat, especially if the U.S. economy settles into a soft landing and the Federal Reserve eases monetary policy in an orderly fashion.
- Risks: High financing costs and input-price pressures remain persistent risks. A prolonged period of elevated borrowing costs could make the burden of debt service and/or refinancing too heavy for borrowers in need of interest-rate relief.
- Ratings: The net outlook bias, indicating potential ratings trends, stayed relatively flat over the past quarter and was at negative 10.3% as of March 15. Telecom, health care, and consumer products still have the highest negative bias—with around 30% of issuers having a negative outlook or on CreditWatch with negative implications.
Artificial intelligence
5. Your Three Minutes In AI: The EU AI Act Could Become A Global Benchmark, March 15, 2024
Miriam Fernandez, CFA, Madrid, + 34917887232, Miriam.Fernandez@spglobal.com
- The EU AI Act establishes a regulatory framework for restricting and limiting AI use that will likely influence companies and regulators across the globe.
- The act is likely to set the tone for global AI regulation. Because it is first, and because it applies to all sectors and all parties involved in an AI value chain (including providers, importers, users, and distributors) and the generalized nature of how integrated global economies are now, S&P Global Ratings believes the framework's influence will stretch across the globe.
- The financial and reputational risk resulting from infringements could be material to credit worthiness.
Building materials
6. Credit FAQ: European Building Materials Firms Display Good Rating Headroom In A Sluggish Environment, March 19, 2024
Pascal Seguier, Paris, + 33 1 40 75 25 89, pascal.seguier@spglobal.com
- Europe's building materials firms are heading for another year of muted organic growth.
- The largest rated entities showed resilience in 2023 and started this year with ample rating headroom.
- S&P Global Ratings expects, however, that operating conditions will remain strained.
Chemicals
7. German Chemical Industry's Decarbonization Is A Team Effort, March 20, 2024
Wen Li, Frankfurt, + 49 69 33999 101, wen.li@spglobal.com
- Rated German chemical companies are well underway to achieve their 2030 decarbonization targets, whose effect on credit metrics is limited.
- However, we believe German chemical companies will struggle to reach carbon neutrality by 2050. To achieve this goal, they would need access to affordable and reliable renewable energy.
- Even though it requires significant investments, the green transition could increase the German chemical sector's growth potential and, to some extent, offset the competitive disadvantage that results from higher energy and feedstock prices.
Consumer products
8. Consumer Goods 2024 Outlook: Carryover pricing supports margins, volumes stay subdued, March 11, 2024
Raam Ratnam, CFA, CPA, London, +44 7789 65 0807, raam.ratnam@spglobal.com
- Branded consumer goods companies' average annualized price increases will level off within the low to mid-single digit range.
- Input and operating costs will continue to moderate. Together with carryover price increases, this will improve profitability in 2024.
- Mature markets will face volume compression as consumers look for value and cheaper private-label alternatives.
- Competition remains intense. Consumer product companies will use gross margin gains to strengthen brand equity through increased advertising and promotional spending.
- Negative bias is concentrated on lower-rated companies, predominantly in the U.S., where the ratings outlook on about 34% of rated companies is negative.
- Spillover effects from geopolitical tensions were lower than we expected but further escalations could increase commodity price volatility and supply chain costs, as well as hurt global trade and consumer sentiment.
9. U.S. Beverage Companies Face A Cautious Consumer In 2024 With Slower Topline Growth And Limited Rating Upside, March 20, 2024
Chris Johnson, CFA, New York, + 1 (212) 438 1433, chris.johnson@spglobal.com
- Sales growth in the U.S. beverage sector will revert closer to pre-pandemic levels with much more muted pricing. Several industrywide trends are likely to change course, including lower on-premise and premium product demand and a heightened promotional environment.
- A margin rebound to historical levels is unlikely as higher promotional and marketing spending will offset operating efficiencies and lower input cost inflation.
- Ratings upside is limited as issuers should increase shareholder returns given the vast majority are operating within their leverage targets.
- Ratings are stabilizing for the handful of issuers we rate in the speculative-grade category, but upside is limited as several companies are still turning around operations.
- Large merger & acquisition (M&A) activity is unlikely in 2024, despite many issuers having sufficiently strong balance sheets, to the extent they curb shareholder returns.
Corporates
10. Credit FAQ: Private Credit Key To Asia's Speculative-Grade Markets, Panelists Say, March 19, 2024
Charles Chang, Hong Kong, (852) 2533-3543, charles.chang@spglobal.com
- Asia's speculative-grade bond market is transitioning. Local-currency bonds are attracting more interest, and private credit is expanding briskly.
- Such trends are prompting institutional investors to take a broader view of Asian speculative-grade--one that incorporates U.S.-dollar bonds, local-currency debt, and private credit.
11. Credit FAQ: Asia Bond Markets Poised For Policy Shifts, Credit Cycle Upturn, Panelists Say, March 13, 2024
Charles Chang, Hong Kong, (852) 2533-3543, charles.chang@spglobal.com
- Asia-Pacific's investment-grade debt markets are in a cyclical sweet spot. This is according to investors, who cite positive policy shifts and the fact that many corporates are in a recovery-and-repair phase after a difficult few years.
- Market participants talked about how low supply has propped up demand for dollar bonds, as issuers in the region increasingly turn to local debt markets. The emergence of dual-currency funding for issuers, as local funding and liquidity deepens, will underpin tight supply in the G3 bond market (debt in U.S. dollars, euros, and yen) in the years to come.
12. Corporate Results Roundup Q4 2023: Earnings show signs of stabilizing, March 21, 2024
Gareth Williams, London, + 44 20 7176 7226, gareth.williams@spglobal.com
- The global Q4 2023 results season for rated nonfinancial corporates is 80% complete, with 83% of results in for investment-grade (IG) and 77% for speculative-grade (SG). North America largely done with 96% of companies having reported and making up 58% of the global count. European results are now 74% complete and Asia-Pacific (APAC) is 62% complete. Data are changing only marginally now week-to-week, so comments here are essentially final.
- Earnings are showing signs of stabilizing. Measured at an annual rate, revenues are near flat (-0.8%) and EBITDA is down 3.4%, a little less than in Q3 (-3.9%). Revenues are down 0.3% versus the same quarter a year ago, while EBITDA is up 1.3%. Assuming the soft- or no-landing arrives, the earnings recession has been modest by historical standards.
- Signs of an upturn are clearer if the volatile commodity sectors are excluded. On that basis, revenues are up 2.5% on an annual basis (Q3 +2.0%) and EBITDA growth has turned positive (+2.2% vs -0.7% in Q3).
- Europe is struggling, with growth weaker and the surprise balance negative for both revenues and EBITDA, in contrast to North America where the same balance is positive and improving. Growth has turned positive versus the same quarter a year ago in Latin America, and the large downturn in APAC earnings to have ended.
- Regional differences are also apparent in our transcript and investor presentation sentiment analysis. Amidst a global improvement, median net positivity scores are highest for North American companies. Nearly all North American industries have net positive sentiment; in Europe, roughly half are negative.
- Industry growth trends continue to show strength from consumer cyclicals and relative weakness for industrial cyclicals, reflecting the resilience of U.S. consumers in particular.
- Pressures and risks are still apparent. Cash interest payments are still surging (up 24% annually), interest coverage continues to fall, and capital expenditure growth is slowing. A third of sectors have seen margins fall annually.
Credit trends and market liquidity
13. CreditWeek: How Are The Riskiest Credits Performing In Current Market Conditions?, March 21, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- Uncertainty over the pace and timing of major central banks' interest rate cuts, the global economic outlook, and intensifying geopolitical tensions are putting particular pressure on corporate issuers rated 'CCC+' and below—and contributing to a continual increasing number and frequency of defaults.
- The 'CCC+' and below rating categories continue to account for a large percentage of total downgrades, with nearly a quarter of all downgrades in February. Amid the high number of rating transitions for these vulnerable credits, S&P Global Ratings' Credit Research & Insights expects defaults to remain elevated.
- This trend is evidenced by this year's global corporate default tally rising to 29 as of last month—marking its highest year-to-date count since 2009, and representing a trend unlikely to end soon after borrowers rated 'CCC+' or below accounted for 89% of defaults in 2023 and 97% of defaults so far in 2024.
14. Default, Transition, and Recovery: 2023 Annual Global Structured Finance Default And Rating Transition Study, March 18, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- The global structured finance default rate nearly tripled to 1.3% in 2023 from a 15-year low of 0.5% in 2022--still well below the long-term one-year average of 3.6%.
- Of the 33,851 global structured finance ratings outstanding at the start of 2023, we lowered 3.3% (up from 2.3% in 2022) and raised 12.4% (up from 9.1% the prior year).
- The CMBS sector led downgrades in the U.S. and Europe in 2023, while defaults were highest globally in U.S. RMBS, particularly among legacy asset classes, and structured credit led defaults in Europe. The RMBS sector also led upgrades in the U.S. and Europe.
- By region, defaults were concentrated in the U.S., with a handful from Europe, one from Latin America, and none from any other regions in 2023. Latin America had the highest downgrade rate, at 4.2%.
15. 'BBB' Pulse: 'BBB's Tough Out Interest Rate Cycles, March 14, 2024
Vincent R Conti, Singapore, + 65 6216 1188, vincent.conti@spglobal.com
- 'BBB' category issuers have exhibited more stability through interest rate cycles than their speculative-grade counterparts. 'BBB' downgrade ratios are nearly uncorrelated with 10-year benchmark rates during upcycles, as opposed to higher positive correlations for speculative grade.
- Rising stars still outnumber fallen angels, although potential fallen angels appear to have bottomed out and are beginning to rise in number from recent historical lows.
- Despite overall relative stability of 'BBB's, commercial real estate and chemicals are sectors to watch for fallen angel risk.
- Fallen angel downgrades are unlikely to remain at the lows of the past year, and we estimate that the amount of debt associated with U.S. and EMEA nonfinancial fallen angel downgrades will increase to $102 billion in the next 12 months.
16. Default, Transition, and Recovery: Elevated European Defaults Help Push Global Corporate Default Tally To Fastest Pace Since 2009, March 13, 2024
Nicole Serino, New York, + 1 (212) 438 1396, nicole.serino@spglobal.com
- With 15 defaults in February, the 2024 global corporate default tally rose to 29, the highest year-to-date default count since 2009.
- Defaults in Europe are well above previous year-to-date totals, at eight--more than double the total of three at this point in 2023.
- By sector, 40% of defaults in February came from either heath care or media and entertainment, with three each.
17. Default, Transition, and Recovery: 2023 Annual Japanese Structured Finance Default And Rating Transition Study, March 23, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- In 2023, there were no rating actions (upgrades, downgrades, or defaults) among Japanese structured finance securities rated by S&P Global Ratings Japan or S&P Global SF Japan.
- For S&P Global Ratings Japan, the residential mortgage-backed securities (RMBS) sector accounted for 99.3% of the ratings outstanding at the start of 2023, while single-name synthetics accounted for the remaining 0.7%.
- For S&P Global SF Japan, RMBS accounted for 89.2% of the ratings outstanding at the start of 2023, while the asset-backed securities sector accounted for 5.0% and single-name synthetics accounted for 5.8%.
18. Default, Transition, and Recovery: 2023 Annual Japanese Corporate And Public Finance Default And Rating Transition Study, March 23, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- There were no defaults recorded among Japanese corporate and public finance issuer credit ratings in 2023--the eighth year in a without a default.
- Of the entities covered by this study, 22 have defaulted since Jan. 1, 1981, and among those with active ratings one year prior to default, all were rated speculative grade, except for two in 2009.
- Entities rated investment grade were far more likely to maintain the same ratings over comparable time periods than were speculative-grade entities.
- The Gini ratio, an indicator of rank-ordering accuracy, shows that ratings on Japanese entities continue to serve as an effective measures of relative default risk.
19. Default, Transition, and Recovery: 2023 Annual Taiwan Structured Finance Default And Rating Transition Study, March 27, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- There were no rating actions among Taiwan structured finance ratings in 2023.
- Among the 95 ratings assigned since the start of 2003, there have been five defaults, making the overall lifetime default rate 5.3%.
- The lifetime upgrade rate is 47.4%, and the lifetime downgrade rate is 11.6%.
20. Default, Transition, and Recovery: 2023 Annual Taiwan Ratings Corp. Corporate Default And Rating Transition Study, March 27, 2024
Nick W Kraemer, FRM, New York, + 1 (212) 438 1698, nick.kraemer@spglobal.com
- There were no defaults among corporate issuers rated by Taiwan Ratings Corp. (TRC) for the seventh straight year.
- The stability rate of TRC's ratings was the highest ever in 2023, at 92.7%, compared with a weighted average from 1999 to 2023 of 79.8%.
- TRC's ratings continue to clearly correspond with the likelihood of default, with default rates among investment-grade ratings well below those among speculative-grade ratings across all time frames, consistent with S&P Global Ratings' global scale ratings.
Cross-sector
21. Credit FAQ: Policy Implications Of China's 2024 "Two Sessions", March 18, 2024
KimEng Tan, Singapore, + 65 6239 6350, kimeng.tan@spglobal.com
- China's latest "Two Sessions" shine a light on the government's policy thinking at an important time.
- The government announced its economic growth target of around 5% and a budget that maintains fiscal policy little changed from last year during these meetings.
- This information is crucial to guiding investors as they navigate changes in China's economic conditions.
22. Credit FAQ: What China's Shifting Priorities May Mean For Its Central SOEs, March 18, 2024
Chang Li, Beijing, + 86 10 6569 2705, chang.li@spglobal.com
- We believe China's central government will maintain its strong support for the SOEs it owns. In contrast, local governments will take a more selective approach to supporting their SOEs.
- Still, China's central SOEs will face major change in coming years as new drivers take the lead for China's economy and national interests.
- Some sectors, like heavy industries, could see their importance to the central government decline over time.
23. Emerging Markets Monthly Highlights: Strong Domestic Demand, Diverging Trajectories, March 13, 2024
Jose Perez Gorozpe, Madrid, +34 -630 -154020, jose.perez-gorozpe@spglobal.com
- Recent Q4 GDP data point to continuing resilience across most emerging markets (EMs), mostly because of solid, albeit, in some cases decelerating, domestic demand, helped by ongoing fiscal stimulus. Growth in EMs with high trade exposure to Developed Europe continue to underperform though.
- Domestic demand trajectories will diverge across EMs in 2024. After strong domestic demand performance in 2023 in EM Asia, we expect household spending to moderate this year, as the lagged effects of tight monetary policy filter through those economies. In contrast, high-frequency indicators in EM EMEA point to improving domestic demand thanks to rising real incomes, particularly in Central and Eastern Europe, following weakness in 2023.
- Financing conditions continue to improve. EM spreads have broadly tightened across all regions. Investment-grade issuance was strong over the last month, while speculative grade issuance remained anemic, as borrowing costs for weaker credits are still significantly high from an historical perspective.
24. Credit Cycle Indicator Q2 2024: Upward Momentum For A Recovery In 2025, March 11, 2024
Vincent R Conti, Singapore, + 65 6216 1188, vincent.conti@spglobal.com
- Our forward-looking global and regional Credit Cycle Indicators (CCIs), which tend to lead credit stress and recovery by six to 10 quarters, maintain their upward trajectory toward a credit recovery in 2025.
- However, headwinds in 2024 could mean a bumpy ride to recovery. Costlier debt, households' reduced propensity to spend, and lenders' risk aversion will strain corporate borrowers' profit margins and liquidity profiles, and exacerbate credit pressures.
- Risk of stickier than anticipated inflation could prompt central banks to keep rates high. A sharp economic slowdown and squeezed disposable income could lead households to pull back on consumption.
25. Global Debt Leverage: Global Debt 2030: Can The World Afford A Multifaceted Transition?, Jan. 10, 2024
Terence Chan, CFA, Melbourne, + 61 3 9631 2174, terry.chan@spglobal.com
- Global leverage trending up and structurally higher interest rates will increase the financing bill for governments, corporates, and households.
- Additional investments will be necessary to address climate-related risks, the energy transition, digital transformation, and an aging population, with developing economies disproportionately affected.
- International collaboration and a combination of public and private capital will be required to make the transition affordable globally, but increasing geopolitical fragmentation will make this more difficult.
Cyber
26. Cyber Security Experts Already Have Many Of The Tools To Manage AI Risks, Say Experts, March 12, 2024
Maria Mercedes M Cangueiro, Buenos Aires, + 54 11 4891 2149, maria.cangueiro@spglobal.com
- The principles of cyber security management can be applied to improving AI security, often with little modification, while quality cyber hygiene is also key to AI security.
- Applying AI tools to security processes and tasks can improve performance, not least by alleviating the burden of analyzing often overwhelming volumes of data.
- Cyber security experts must engage with AI developers, regulators, and executives on their terms to ensure that security is built into AI's development, rules, and applications.
Economics
27. Economic Outlook Asia-Pacific Q2 2024: APAC Bides Its Time On Monetary Policy Easing, March 26, 2024
Louis Kuijs, Hong Kong, +852 9319 7500, louis.kuijs@spglobal.com
- We see China's GDP growth slowing to 4.6% in 2024 from 5.2% in 2023. Our forecast factors in continued property weakness and modest macro policy support. Deflation remains a risk if consumption stays weak and the government responds by further stimulating manufacturing investment.
- Among developed economies, we forecast growth to pick up in trade-dependent developed ones such as South Korea, Taiwan, and Singapore; and fall in relatively domestic demand-led ones such as Japan and Australia. For Asian emerging market (EM) economies, we generally project robust growth, with India, Indonesia, the Philippines, and Vietnam in the lead.
- The fall in inflation momentum has so far not been enough to convince Asia-Pacific central banks to start cutting rates. If rates continue to choke demand, the case for lowering will strengthen in coming months. We expect the Bank of Japan to modestly raise rates in the next four years.
28. Economic Outlook Canada Q2 2024: Staying Subdued, March 27, 2024
Satyam Panday, San Francisco, + 1 (212) 438 6009, satyam.panday@spglobal.com
- GDP growth in Canada will remain sluggish in coming quarters as higher interest rates continue to work through the economy. We now expect real GDP growth of 0.9% in 2024.
- Canada's job market will continue to be lackluster amid subpar domestic demand. Our forecast now sees the unemployment rate averaging 6.1% in 2024.
- We expect a 25-basis-point rate cut from the Bank of Canada in June, followed by cuts totaling 50 basis points in the second half of this year. And next year, we think there will be an additional 125 basis points of easing.
29. Economic Outlook Emerging Markets Q2 2024: Growth Divergence Ahead, March 26, 2024
Elijah Oliveros-Rosen, New York, + 1 (212) 438 2228, elijah.oliveros@spglobal.com
- We believe resilient global growth, especially in the U.S., and loosening financial conditions have marginally improved macroeconomic conditions for emerging markets (EMs) since the end of 2023.
- However, EMs still have to contend with the lagged effects of high interest rates and the consequences of the U.S.' eventual shift to below-trend growth, which we expect in the second half of the year.
- We expect growth in EMs will diverge significantly in 2024, moderating for many countries that outperformed in 2023 and slightly increasing for some countries that underperformed.
30. Economic Outlook Eurozone Q2 2024: Labor Costs Hinder Disinflation As Rate Cuts Loom, March 26, 2024
Sylvain Broyer, Frankfurt, + 49 693 399 9156, sylvain.broyer@spglobal.com
- The European economy remains on track for activity to improve and employment growth to moderate. However, uncertainty over productivity trends and slow implementation of the Next Generation EU recovery package may cause the rebound in growth to be weaker than we expected. We have revised our 2025 GDP growth forecast down to 1.3% from 1.5%.
- Record high labor costs are limiting the scope for disinflation. We have slightly increased our inflation forecasts to 2.1% in 2025 and 1.9% in 2026, reflecting prolonged high wage growth against a backdrop of sluggish productivity.
- We expect the European Central Bank (ECB) to cut rates three times in 2024, starting in June. The potential for further rate cuts in 2025 seems more limited than we thought. The deposit facility rate could bottom out at 2.5% in 2025 instead of the 2.0% we considered previously.
31. CERAWeek 2024 Takeaways: The Industry Finds Its Voice, March 21, 2024
Paul F Gruenwald, New York, + 1 (212) 437 1710, paul.gruenwald@spglobal.com
- The rising industry voice in the sustainability debate calls for pragmatic and feasible solutions.
- Generative AI is seen as a positive game changer.
- Discussion of carbon capture and sequestration (CCS) is gaining momentum.
- The Inflation Reduction Act(IRA) will survive any 2024 election outcome.
32. Economic Research: Shifting Green Growth Narratives Are Fostering The Energy Transition, March 20, 2024
Marion Amiot, London, + 44(0)2071760128, marion.amiot@spglobal.com
- The climate policy paradigm has moved from a doom-and-gloom view, where economic growth isn't possible, to a more constructive model in which growth and a sustainable environment can coexist.
- With this, the focus of climate policy has expanded to include not only the costs of the energy transition but also opportunities for innovation and growth.
- Decarbonizing fossil-fuel-reliant sectors and expanding renewable energy capacity is complicated by additional hurdles, in particular trade frictions, budget constraints, and distribution issues.
33. Economic Outlook Q2 2024: The U.K. Is Slowly Turning A Corner, March 26, 2024
Marion Amiot, London, + 44(0)2071760128, marion.amiot@spglobal.com
- U.K. consumers' purchasing power is gradually improving amid a resilient labor market, paving the way for a recovery of consumption, and lower energy bills have improved the terms of trade.
- Monetary policy will likely start easing in August as inflation cools, with rate cuts this year and next spurring investment and potentially adding about 2 percentage points to economic activity, albeit most of the impact will come in 2026 and 2027.
- Prospects for potential growth remain robust since demographic trends are still dynamic, and we anticipate a rebound in investment to boost productivity in sectors that have seen less improvements than others.
34. Economic Outlook U.S. Q2 2024: Heading For An Encore, March 26, 2024
Satyam Panday, San Francisco, + 1 (212) 438 6009, satyam.panday@spglobal.com
- S&P Global Ratings expects U.S. real GDP growth of 2.5% in 2024 as the labor market remains sturdy. We continue to expect the economy to transition to slightly below-potential growth in the next couple of years.
- Inflation will likely remain above (but approaching) the Fed's target of 2% through 2024, reflecting persistently higher service price inflation, even as goods prices ease modestly.
- Above-target inflation will limit the Fed's ability to ease rates this year. We continue to pencil in 75 basis points (bps) of rate cuts in 2024, with the first cut likely coming in the summer.
- Our base case is a sharper easing of 125 bps next year, though we see risks that the pace of easing could be slower in 2024 and 2025.
Environmental, social and governance
35. Sustainability Insights | Research: E-fuels: A Challenging Journey To A Low-Carbon Future, March 25, 2024
Terry Ellis, London, +44 20 7176 0597, terry.ellis@spglobal.com
- Synthetic fuels, or e-fuels, could support decarbonization objectives across numerous sectors. We think aviation and shipping will be the main users of future e-fuels. Policy moves in Europe will likely create a market for these fuels, but huge investment will be required to supply the inputs that make them a low-carbon solution.
- Economic models for e-fuels remain uncertain for now. High input-energy requirements present a significant cost barrier for both producers and consumers. There are material technological hurdles still to overcome and, beyond carbon, e-fuels still emit other pollutants. Other environmental exposures could persist.
- We see limited credit impact in the next decade given modest regional ambitions regarding e-fuel use. They will have time to plan, but aviation and shipping companies in Europe might need to make difficult choices in the next decade as regulations take effect.
36. ESG In Credit Ratings March 2024: A North American Clean Sweep, March 19, 2024
Brenden Kugle, Centennial, +1-303-721-4619, brenden.kugle@spglobal.com
- There were 13 rating actions related to environmental, social, and governance (ESG) factors in February, up from eight in January--with negative actions continuing to outpace positive ones.
- All 13 of February's ESG-related rating actions came from North America. It was the first month without multiple region contributors to ESG-related rating actions since we began linking rating actions to ESG factors in April 2020.
- Governance factors (11) remained the primary driver. Risk management, culture, and oversight (five) was the primary governance factor.
- In February, U.S. public finance continued to be the sector with the most ESG-related rating actions (nine), and all but one were negative. In addition, governance factors drove all nine of those rating actions, five of which were CreditWatch negative placements.
37. ESG In Credit Ratings Deep Dive: ESG Factors Drove 13% Of Corporate And Infrastructure Rating Actions Since 2020, March 13, 2024
Brenden Kugle, Englewood, +1-303-721-4619, brenden.kugle@spglobal.com
- Rating actions: ESG factors were cited as a rating driver in 13% of all corporate and infrastructure rating actions between April 2020 and December 2023. More than threequarters of the ESG-related rating actions were negative. We provide the full list of ESG-related rating actions in this report below.
- ESG factors: Rating actions related to health and safety accounted for 83% of ESG related rating actions since April 2020--largely as a result of COVID-19. But governance factors were also a key driver, having played a part in 28% of ESG-related rating actions in 2023.
- Rating action severity: ESG-related rating actions generally mirrored the pace of corporate and infrastructure rating actions overall--but with the notable exception of one-notch downgrades. Nearly 32% of ESG-related corporate and infrastructure rating activity was one-notch downgrades, compared with only 21% for all corporate and infrastructure ratings actions.
- Climate related risks: Up to now, they've only driven a low number of credit rating actions--but the number did double in 2023. And it may increase in the years ahead as more disruptive regulations potentially emerge and as issuers make the generally costly low-carbon transition. An increase may also reflect the more frequent and severe physical risks that could stem from climate change.
Financial institutions
38. Your Three Minutes In Banking: European Banks' Earnings Top Equity Costs, For Now, March 19, 2024
Karim Kroll, Frankfurt, 6933999169, karim.kroll@spglobal.com
- Record aggregate profits in 2023 will mean most European banks can (at last) cover their cost of equity, helping them to boost equity valuations. That could prove fleeting if interest rate support fades.
- Some domestic European commercial banks may struggle, in 2024, to clear cost of equity hurdles that can vary from 6.2% to 12.3%, according to S&P Global Ratings' estimates.
39. Eurozone Banks: ECB's Operational Framework Review Backs The Status Quo, March 14, 2024
Sylvain Broyer, Frankfurt, + 49 693 399 9156, sylvain.broyer@spglobal.com
- The European Central Bank's (ECB's) new operational framework won't tighten conditions for banks to access central bank liquidity and should prove supportive of bank funding and profitability.
- It also does not imply any acceleration in the reduction of the ECB's balance sheet, although this is not ruled out either.
- The ECB left little room for a strong resurgence in money market transactions, and especially unsecured interbank lending, not least by announcing plans to reduce the spread between its main refinancing operations rate and the deposit facility rate to 15 basis points, from 50 basis points.
40. Ten Takeaways From The Big European Bank Giveaway, March 14, 2024
Giles Edwards, London, + 44 20 7176 7014, giles.edwards@spglobal.com
- The trends underlying European bank results for 2023 were in line with our expectations, with an even stronger earnings upswing than we would have assumed one year ago.
- While banks typically remain confident about 2024, the upswing has likely already peaked for many, and earnings could slide further if downside risks play out.
- Solid capitalization and operating performance continue to provide a platform for substantial shareholder distributions from the sector.
- We remain watchful for signals of asset quality deterioration, and around how banks manage the competing pressures on costs, and net interest margins.
41. French Banks' Results Should Generally Strengthen In 2024 After A Mixed 2023, March 22, 2024
Clement Collard, Paris, +33 144207213, clement.collard@spglobal.com
- French banks' net profits were mixed (and underlying results even more so) in 2023, but generally lagged European peers due to the slower repricing of predominantly fixed-rate assets, which delay the benefit of rising interest rates.
- Earnings should improve in 2024 as higher interest rates feed through, though those gains may be delayed until the second half of the year due to declining new loan volumes and already-decreasing customer interest rates.
- Deposits will continue to shift from being non-interest bearing to interest bearing in 2024 but at a slower pace as interest rates have peaked and regulated savings rates are fixed until January 2025.
- We continue to view major French banks' creditworthiness as stable, supported by positive risk-adjusted profitability and resiliency across the cycle, partly thanks to their diversification.
42. Global Shadow Banks Face Scrutiny As Risks Rise, March 20, 2024
Nicolas Charnay, Frankfurt, +49 69 3399 9218, nicolas.charnay@spglobal.com
- Shadow banks continue to play an important role in credit intermediation in many countries. This enhances financial markets' efficiency and depth, but also brings meaningful risks.
- Shadow banks' concentration in certain economic sectors, among other characteristics, means that they are not immune to economic and interest rate cycles. We therefore expect their financial positions to come under stress periodically.
- Traditional banks' exposures to shadow banks are not as limited as they first appear. How banks and regulators review and manage their direct and indirect exposures to shadow banks is an area to watch in 2024.
43. CreditWeek: What Have We Learned In The Year Since SVB Triggered Turmoil In The Banking Sector?, March 14, 2024
Giles Edwards, London, + 44 20 7176 7014, giles.edwards@spglobal.com
- One year on from the banking sector turbulence that saw the collapse of regional lenders Silicon Valley Bank (SVB) and Signature Bank in the U.S., and, subsequently, the much larger Zurich-based Credit Suisse, policymakers are targeting tougher regulation to allay the risk and fears of another crisis.
- S&P Global Ratings views tougher regulation on liquidity as a net positive for creditors. Although there are associated costs, liquidity is the critical risk for confidence-sensitive banks so it's beneficial that a bank is ready to mobilize as much of its asset base as possible in a stress event—especially since a lack of such preparation was part of the issue in March of last year.
44. Your Three Minutes In Banking: BCBS Calls Time On G-SIB Window Dressing, March 13, 2024
Giles Edwards, London, + 44 20 7176 7014, giles.edwards@spglobal.com
- The Basel Committee on Banking Supervision wants to change how it judges a bank's systemic importance.
- It has had enough of what it sees as the largest global banks' attempts to obscure how systemically important they are.
- Reduced window-dressing would mean that period-end balance sheets would more accurately reflect a bank's health throughout the period.
45. Credit FAQ: GCC Banks' Climate Transition Journey Has Only Just Begun, March 21, 2024
Mohamed Damak, Dubai, + 97143727153, mohamed.damak@spglobal.com
- We assessed rated GCC banks' direct lending to economic sectors that are most directly exposed to the climate transition, including oil and gas, mining and quarrying, manufacturing, fossil fuel-fired power generation, and some public-sector lending.
- Based on GCC central banks' public disclosures, our analysis shows that GCC banks' direct lending exposures to these sectors stood at about 12% of total lending at year-end 2023 and remained stable over the past three years.
- GCC banks are trying to advance their relatively nascent sustainability programs by increasing their sustainable finance offerings to customers and contributing to government efforts to decarbonize local economies. However, we are yet to see bold regulatory actions in the region, including the introduction of climate stress testing or other measures to encourage banks to reduce climate transition risks.
46. Mexico's Banks Are Well Positioned As Its Central Bank Starts Cutting Rates, March 22, 2024
Elijah Oliveros-Rosen, New York, + 1 (212) 438 2228, elijah.oliveros@spglobal.com
- We think there's a high likelihood that, after the rate cut at its March 21 meeting, Mexico's central bank will proceed cautiously with 25-basis-point rate cuts at each of its remaining monetary policy meetings this year.
- There's a high degree of uncertainty about what the terminal interest rate in Mexico will be. Our view is aligned with what the market currently expects: a terminal rate of about 7%.
- Mexico's banks are well positioned for a rate-cutting cycle. While we see greater challenges in the horizon for medium and small banks, lower funding costs will help smaller entities and could give oxygen to nonbank lenders.
47. Some U.S. Regional Banks Could Face Higher Risk If Commercial Real Estate Asset Quality Worsens, March 27, 2024
Stuart Plesser, New York, + 1 (212) 438 6870, stuart.plesser@spglobal.com
- The impact of declining commercial real estate (CRE) prices could pressure some regional banks if asset quality were to deteriorate.
- Credit quality metrics, such as delinquencies and charge-offs are still relatively benign for most banks, though they are rising. But criticized CRE loans have picked up and are high at some banks.
- We recently reviewed our rated U.S. banks, focusing largely on the banks with highest proportion of loans to the CRE sector, and as a result revised outlooks on five banks to negative from stable.
Healthcare and pharmaceuticals
48. Health Care IT Improves Cash Flow And Visibility; Rating Pressure Persists, March 14, 2024
Sarah Kahn, Washington D.C., + 1 (212) 438 5448, sarah.kahn@spglobal.com
- Our rating forecast for the health care information technology (IT) sector is negative for 2024. Cash flow is still limited and capital structures highly leveraged as companies pursue growth strategies.
- With hospital operating margins improving due partially to moderating labor costs and normalizing utilization and acuity, we expect health care spending on software and IT services will remain strong in 2024, with IT vendors expanding organically in the mid- to high-single-digit percentages.
- Though electronic health records providers may see limited upside, we expect revenue cycle management firms with contracts tied to collections to benefit from medical inflation, increasing utilization, and reimbursement rate increases.
- If interest expense remains elevated, software companies may struggle to execute their growth strategies to expand into their capital structures.
- We anticipate moderately increasing mergers and acquisitions in 2024. This will likely constrain rating upside over the near term.
Infrastructure
49. Fork In The Road: China's Listed Toll-Road Operators To Choose Between Costly Investments Or Losing Out, March 25, 2024
Kendrew Fung, Hong Kong, +852 2533 3540, kendrew.fung@spglobal.com
- China's 22 listed toll-road operators face big changes and tough decisions in the next 10 years.
- Concessions will expire for a material portion of toll road assets over the next decade. This will significantly reduce revenues unless the listed operators can renew the concessions through expansion projects (e.g.,road widening with extra lanes to existing assets).
- However, land costs have soared over the decades since the original concessions were granted. This and much higher construction costs could drag on investment returns for toll-road projects.
- By our estimates, it would take an average of 28 years of toll revenue to recoup investment costs, barring any tariff or traffic increment. This is based on data showing median expansion construction costs of about Chinese renminbi (RMB) 163 million per kilometer (km), versus the reported median annual toll of RMB5.75 million per km in 2022 for the 22 listed toll road operators in China.
- Without large hikes in tariffs, projects won't have the same returns as existing roads. We expect the financials of listed toll road companies will weaken if they commit to the debt-heavy investments over the next decade.
- Alternatively, failure to extend concessions of their major toll road assets will lead to material revenue drops.
50. Shedding Light On Fiber Project Financing In Europe, March 19, 2024
Livia Vilela, Madrid, + 34 91 423 3181, livia.vilela@spglobal.com
- We could rate a European fiber infrastructure operator's debt under our project finance methodology, if the transaction documentation includes important limitations on the issuer's actions and provide rights to creditors that reduce default risk through collateral packages and covenants.
- Even if we view fiber to be the lead access technology for high-speed broadband services and we believe 5G fixed wireless to remain a niche in most European markets, we are likely to factor in technology risk by reducing fiber's market share over the long term.
- Our business assessment of a fiber project's operations phase is likely to be determined by the project's competitive exposure, because roll-out complexity and operational availability may be regarded as low risks.
- Unless strong mitigants from market exposure are in place, we expect a project facing uncertainty on tariffs or penetration, for instance, due to competing technologies and/or other fiber providers would unlikely reach investment grade ratings.
Leisure and lodging
51. U.S. Lodging Sector RevPAR Growth Will Moderate In 2024, March 13, 2024
Christopher Keating, San Francisco, + 3122337200, christopher.keating@spglobal.com
- U.S. revenue per available room (RevPAR) will likely grow 2%-4% in 2024 compared to growth of around 5% in 2023, as a move toward normalization causes hotel demand to align with GDP and real consumer spending.
- We expect occupancy will remain several percentage points below prior cycle peak levels as hotel operators prioritize profitability and maintain elevated average daily rate (ADR) in lieu of filling rooms.
- U.S. RevPAR growth in 2024 will be the result of group and business transient travel as we expect leisure travel to cool off.
Leveraged finance
52. New Obstacles Haven't Blocked Europe's Preference For English Restructuring, March 26, 2024
Patrick Janssen, Frankfurt, + 49 693 399 9175, patrick.janssen@spglobal.com
- English courts' recent decisions in two restructuring cases involving Germany-focused companies have highlighted how fraught with challenges pre-insolvency court sanctioned restructuring can be.
- Statements made by an Appeal Court judge suggest that new cases will continue to be scrutinized for evidence that companies from Europe have established a reasonable argument for accessing English courts.
- Companies may increasingly look to alternative pre-insolvency court options, such as Germany's Stabilization and Restructuring Framework (StaRUG), or could shy away from the challenge and cost of pre-insolvency court restructuring by opting for insolvency, despite its typically lower debt recoveries.
53. Market Insights: Sector Intelligence | Leveraged Finance: European Summary Report, March 26, 2024
Nicole Guido, London, +44-20-7176-0468, nicole.guido@spglobal.com
- S&P Global Ratings expects recovery rates for rated first-lien debt to be lower than historical averages. Empirical estimates of actual first-lien debt recoveries show a notable recent degradation. This could persist or worsen given the increase in top-heavy debt structures and the dominance of covenant-light term loans. Out-of-court restructurings pose challenges to the predictability of outcomes because they can materially impair the recovery prospects of certain investors and create winners and losers in the same group of creditors.
- Although the U.S. leads with 17 defaults, Europe's increased default activity has contributed to the overall pace. With eight so far in 2024, Europe has seen double the number of defaults compared to any previous year since 2008. Given the prevalence of lower-rated companies in the region, we anticipate European defaults will remain high in the near term, potentially with a slight rise over the summer.
- Despite recent market optimism and a decline in fixed-rate yields, many businesses and households will still face higher interest rate burdens. With upcoming maturities in 2024 and 2025, issuers will need to navigate market rates that are still roughly 2% higher than those on their existing debt.
54. Are Prospects For Global Debt Recoveries Bleak?, March 15, 2024
Steve H Wilkinson, CFA, New York, + 1 (212) 438 5093, steve.wilkinson@spglobal.com
- Debt investors are concerned about recovery rates after the sharp rise in defaults in 2023, ongoing macroeconomic uncertainty, and intense and unpredictable geopolitical clashes.
- S&P Global Ratings expects recovery rates on rated first-lien debt to be lower than historical averages.
- Empirical estimates of actual first-lien debt recoveries in the U.S., Canada, and Europe show a notable degradation in recent periods. This may persist or worsen given the rise in top-heavy debt structures and dominance of covenant-light term loans.
- Historical and future recoveries in Brazil and Mexico appear better (despite our concerns about their insolvency regimes), given the persistence of simple debt structures with high unsecured debt and limited higher-priority claims.
- Recovery prospects in Australia, New Zealand, and Singapore also appear somewhat better than in the U.S. and Europe due to a regional skew toward higher-rated entities and less top-heavy debt structures.
- Aggressive out-of-court restructurings (primarily in the U.S.) are also a concern because they can materially impair the recovery prospects of certain investors and create winners and losers from the same group of creditors.
- While out-of-court restructurings are not predictable or quantifiable (and thus not factored into our recovery ratings prospectively), they will reduce recovery outcomes and increase volatility for some creditors than our current estimates.
- The complexity and idiosyncratic nature of out-of-court restructurings means aggregate recovery statistics may not capture the impact.
55. Market Insights: Sector Intelligence | Leveraged Finance, March 14, 2024
Minesh Patel, New York, +1-212-438-6410, minesh.patel@spglobal.com
- Speculative-grade issuers are benefiting from a rebound in issuance and tightening credit spreads. Some issuers are also benefitting from easing financing conditions, which are providing them with breathing room to address their near-term maturities. While these issuers have been able to find funding for their existing debt, the cost to maintain this debt has risen since 2022.
- Given positive GDP trends and steady inflation, we expect the pace of defaults will decline in the fourth quarter from its 5% peak in the third quarter but still exceed 2023's total by the end of the year. We expect the U.S. trailing-12-month speculative-grade corporate default rate will reach 4.75% (80 defaults) by December 2024. 1 In January, there were seven U.S. and Canadian defaults, which lifted the preliminary January trailing-12- month speculative-grade corporate default rate (4.7%) above its long-term average (4.1%).
- The negative bias among speculative-grade issuers increased to 23% in February 2024, which compares with 19% in February 2023. Telecommunications, consumer products, and real estate have the highest percentage of negative outlooks respective to the total number of sector credits, which suggests a gloomier ratings outlook for those issuers.
Media and telecom
56. Rated GCC Telcos Reinvent Themselves As Techcos, March 19, 2024
Tatjana Lescova, Dubai, + 97143727151, tatjana.lescova@spglobal.com
- Higher growth rates, broader business diversification, and lower capital intensity fuel the tech appetite of telecommunications companies (telcos) in the Gulf Cooperation Council (GCC) region.
- Telecom markets in the GCC region are mature, which limits rated GCC telcos' revenue growth to about 1%-3% annually. This stands in stark contrast to tech companies' (techcos') revenues, which we expect will increase by double digits.
- GCC telcos' diversification strategy could improve their cash flow generation potential, thanks to tech businesses' lower asset intensity. Yet, it could also impair their profitability. Techcos' margins, which are on average lower than telcos', could dilute telcos' consolidated EBITDA margins by 100 basis points (bps) to 300 bps over the next three years.
- We do not expect that the increasing revenue contribution from non-telecom operations will have a rating impact on the rated GCC telcos over the next two to three years and expect rated GCC telcos will continue to exhibit low leverage. Over the longer term, however, we will consider the potential rating impact of GCC telcos' changing business mix, competitive threats, and ability to balance growth and leverage.
Oil and gas
57. Key Credit Drivers For North American Midstream Energy Companies In Q2 2024, March 20, 2024
Michael V Grande, New York, + 1 (212) 438 2242, michael.grande@spglobal.com
- We are refreshing our views on the key drivers for credit quality for the midstream energy industry following generally favorable year-end results for 2023.
- Infrastructure development will continue despite a pause on LNG export licenses.
- Storage capacity will be critical to managing natural gas flows.
- For Canadian midstream credit quality, 2024 will be a critical year.
- The pace of acquisitions will accelerate.
Private markets
58. Secondary Markets: Loan Pricing Marches Higher In March, March 21, 2024
Jon Palmer, CFA, Austin, 212 438 1989, jon.palmer@spglobal.com
- After leveling out last month, the average bid on all loans in our data set rose to 98.91 as of March 15, marking its highest level since we started sampling in October 2022.
- The rally includes sponsored and not sponsored loans, with average bids reaching highs of 98.71 and 99.29, respectively, for first liens.
- Market dynamics continue to improve, and the bid-ask spread for sponsored first liens is now just 5 basis points (bps) wider than not sponsored first liens at 72.5 bps and 67.9 bps, respectively.
- The distressed ratio for all loans we cover fell to 13.2%--the lowest level in our coverage.
59. Private Credit Demand Spurs Growth Of Nontraded Business Development Companies, March 15, 2024
Evan M Gunter, Montgomery, + 1 (212) 438 6412, evan.gunter@spglobal.com
- Total assets of business development companies (BDCs) and interval funds rose by near 12% over the past year to $325 billion in third-quarter 2023, and this growth is supporting the availability of funding for private credit borrowers.
- Nontraded BDCs have led the recent growth, with total assets of nontraded BDCs nearly tripling over the past two years.
- While private credit borrowers have shown progress reducing near-term maturities over the last year, these recent refinancings are adding to the maturities coming due in 2028.
- The average yield on a private credit loan fell somewhat in the third quarter of 2023, down 48 basis points (bps) to 10.3% as investors began to look ahead to eventual rate cuts.
Public finance
60. Brazil's Fiscal Recovery Programs Support Local And Regional Governments' Finances Amid Budget Rigidities, March 15, 2024
Victor C Santana, Sao Paulo, + 55 11 3039-4831, victor.santana@spglobal.com
- The Brazilian central government's framework for overseeing and supporting local and regional governments (LRGs) has yielded both favorable and adverse effects in the past seven years.
- On the positive side, in addition to debt relief, the 2021 fiscal recovery programs aimed to contain LRGs' spending. Moreover, the tighter monitoring of their finances, coupled with penalties to keep LRGs in compliance with fiscal prudence during periods of economic expansion, aims to prevent future rounds of fiscal bailouts.
- However, in S&P Global Ratings' view, the implemented or proposed changes in 2023 loosen the framework's guidelines, which reduce its effectiveness in strengthening LRGs' creditworthiness over the long term.
- The fiscal recovery programs don't address all LRGs' spending restraints in the long term, which mostly require constitutional reforms, such as deindexation of expenditures. Nonetheless, LRGs that join the fiscal programs and comply with the guidelines should be able to gradually improve their credit quality by partially addressing budgetary shortfalls.
61. China LGFVs' Bigger Housing Role: Risk Control Matters, March 27, 2024
Laura C Li, CFA, Hong Kong, + 852 2533 3583, laura.li@spglobal.com
- China's "Three Major Projects" initiative could involve up to RMB3 trillion-RMB4 trillion in policy-driven land and property development over 2024-2025. This includes the repackaging of some existing plans.
- LGFVs deployed in this endeavor will need to borrow and invest more, impeding efforts to eventually deleverage the sector.
- This initiative could provide a way for LGFVs to transition their businesses; however, it will also increase their exposure to property-market risk.
- Local governments will reprioritize targets and reallocate resources to limit the need to increase spending or raise new debt.
62. China LRGs: Recouping Revenue Is Key To Fiscal Sustainability, March 27, 2024
Wenyin Huang, Singapore, +65 6216 1052, Wenyin.Huang@spglobal.com
- The revenue-generating power of China's local and regional governments (LRGs) hinges on the property sector stabilizing and no further step-up in fiscal relief programs.
- Slow progress on these fronts could delay the path toward fiscal sustainability for the LRGs by another year. This is particularly acute for economically stronger governments that are less reliant on central government transfers.
- A one-off cashback in 2022 made the sector's preliminary fiscal results in 2023 look better than they actually are, in S&P Global Ratings' view.
63. Maryland Transportation Authority’s Credit Quality Not Affected By Francis Scott Key Bridge Collapse, March 27, 2024
Andrew J Stafford, New York, + 212-438-1937, andrew.stafford1@spglobal.com
- S&P Global Ratings today said that the disruption and damage from the recent collapse of the Francis Scott Key Bridge (Interstate 695) in Baltimore is not expected to have immediate credit implications for its ratings on Maryland Transportation Authority (MDTA; AA-/Stable), which operates the bridge, nor on the ratings on the City of Baltimore general obligation (GO) debt (AA/Stable) or the State of Maryland GO debt (AAA/Stable).
- However, the long-term financial impact, particularly for MDTA, will likely be unknown for some time.
64. U.S. Transportation Infrastructure 2024 Activity Estimates Indicate A Return To Pre-Pandemic Levels And Growth, With Transit Ridership Still Recovering, March 21, 2024
Joseph J Pezzimenti, New York, + 1 (212) 438 2038, joseph.pezzimenti@spglobal.com
- Our recently updated U.S. economic forecast, which calls for real GDP growth of 2.4% in 2024 with no recession, bodes well for U.S. airports, ports, toll roads, and mass transit providers.
- We believe activity measures across most transportation modes will likely return to near pre-pandemic historical averages, although industry-specific variables such as airline capacity constraints, trade tariffs, geopolitical conflicts, and growing cost pressures could dampen near-term growth.
- Remote work trends will continue to drag on public transit ridership, with our activity estimates showing public transit recapturing about 75% of pre-pandemic activity in 2024, 80% in 2025, and only about 85% in 2026.
65. U.S. Local Governments Are Turning To Cyber Risk Pools For Savings And Security Benefits, March 14, 2024
David H Smith, Chicago, + 1 (312) 233 7029, david.smith@spglobal.com
- High cyber insurance premiums and difficulties securing coverage are prompting local governments to form cyber risk pools, where they self-insure in a group administered by a third-party manager.
- In addition to more affordable coverage, mutualization provides a forum in which similar entities can discuss cyber security risks and develop best practices.
- Participation in risk pools, coupled with adherence to rigorous cyber security risk mitigation strategies, may reduce costs and could improve public sector entities' overall credit quality.
66. U.S. Public Housing Authorities Capital Fund Ratings Remain Resilient Amid Higher Appropriations And No Planned Borrowing, March 14, 2024
John T Mariotti, Englewood, + 1 (303) 721 4463, john.mariotti@spglobal.com
- S&P Global Ratings publicly rates 25 transactions related to PHAs' capital fund financing program bonds.
- While all public ratings' outlooks are currently stable, rating changes typically reflect either fluctuations in capital fund awards received by HUD or our opinion of an authority's managerial capacity. 92% of public ratings are 'AA-'.
Real estate
67. Credit FAQ: Will China's 'White List' Boost Housing Sentiment?, March 26, 2024
Fan Gao, Hong Kong, + (852) 2533-3595, fan.gao@spglobal.com
- China's city governments are moving rapidly to identify property projects eligible for fast-track funding and related support. Some 6,000 projects have been queued up since the central government announced a coordination mechanism and "white list" scheme on Jan. 5, 2024.
- S&P Global Ratings believes the policy is aimed at rebuilding homebuyer confidence. Indeed, projects don't have to be distressed to make the white list. The aim, in our view, is to reduce uncertainty on deliveries. The vast majority of China's new-home purchase are on a pre-sales basis, so such uncertainty can be damaging to the market.
68. Real Estate Monitor: Higher-For-Longer Interest Rates Will Continue To Weigh On The Sector, March 21, 2024
Ana Lai, CFA, New York, + 1 (212) 438 6895, ana.lai@spglobal.com
- For commercial real estate (CRE), higher rates continue to pressure asset valuations by increasing cap rates, weighing on debt service coverage ratios across property types.
- We expect credit quality for equity REITs to weaken modestly in 2024 given that office REITs remain pressured due to refinancing risk and weaker operating performance, while commercial mortgage REITs continued to face declining asset quality, primarily driven by office loans.
- For real estate brokers, property and facilities management services have been resilient, while the timing of the revival of CRE sales and leasing activity is less certain.
- Demand for housing remains resilient due to the sturdy job market, and sales for homebuilders continues to recover, supporting stable credit quality.
- We expect the building materials sector to face modest pressure in the first half of 2024 with potential for improvements in the second half as an expected rate cut could drive a recovery in spending.
69. Hong Kong Retail Property: Can The Resilience Last?, March 26, 2024
Wilson Ling, Hong Kong, +852 25333549, wilson.ling@spglobal.com
- Hong Kong's retail property sector has shown some resilience amid a return of mainland Chinese shoppers to the city, and the trend will be a cash-flow stabilizer for property firms for the next 12 months.
- However, we are somewhat skeptical that the recent improvement in retail sales can be sustained, given weak capital market and investment activity.
- The recovery in the retail subsegment is uneven: luxury spaces, as well as those properties targeting tourists, are doing well, while properties selling staples to locals are seeing soft sales and lease rates.
Structured finance
70. Asset Price Risks: Income And Residential Property Values Diverge For Australian RMBS And Covered Bonds, March 25, 2024
Erin Kitson, Melbourne, + 61 3 9631 2166, erin.kitson@spglobal.com
- Australian property prices have outpaced income growth for most of the past two decades.
- This widening gap adds to economic imbalances.
- We recently published a request for comment to revise our approach for assessing residential loans in Australia, New Zealand, and Singapore.
71. Your Three Minutes In European CLOs: Altice France Isn't A Big Problem, For Now, March 27, 2024
Emanuele Tamburrano, London, + 44 20 7176 3825, emanuele.tamburrano@spglobal.com
- A sharp dip in in the price of bonds issued by Altice France S.A. and Altice France Holding S.A. (together, Altice France) is unlikely to have significant knock-on effects for collateralized loan obligations (CLOs), despite the group's status as the largest individual issuer of debt to European CLOs rated by S&P Global Ratings.
- The potential for damage is cushioned because CLOs have no forced-sale mechanism, which would make them realize losses related to the market-value of the debt. All things being equal, even a default by Altice France, or a credit rating downgrade, would have limited repercussions for CLOs' performance.
72. European ABS And RMBS: External Liquidity Reserves Withstand Rising Rates, March 22, 2024
Giovanna Perotti, Milan, + 39 02 72 111 209, Giovanna.Perotti@spglobal.com
- Despite rising interest rates, the size of external liquidity reserves in most European ABS and RMBS transactions have remained broadly unchanged since 2020.
- Between Q1 2022 and Q2 2023 ABS and RMBS originators did not reflect higher interest rates to borrowers, while at the same time funding spreads and swap costs increased. This resulted in depleted excess spread and increasing reliance on external liquidity support.
- Consequently, some transactions have less available external liquidity to address significant event-driven liquidity disruptions, such as those deriving from commingling or cyber-attack risks.
- Generally, transactions have structural features to mitigate liquidity events, such as using principal to pay interest and deferrable notes. However, such mechanisms may affect the timing and repayment of the junior notes.
73. Credit FAQ: ABS Frontiers: U.K. Bridging Loan RMBS Explained, March 20, 2024
Alastair Bigley, London, + 44 20 7176 3245, Alastair.Bigley@spglobal.com
- Bridging loans have many specific use examples and usage differs from case to case. A bridging lender for a residential bridging loan may be able to lend faster than a high street mortgage lender to complete a loan, allowing the borrower to beat other potential purchasers to acquire a property in a high demand area.
- Given most lending is unregulated and banks form only part of the market, figures on the market's size should be regarded as best estimates. The Association of Short Term Lenders (ASTL) estimated advances by their members to be £7.6 billion at the end of 2024.
74. CLO Spotlight: The Impact Of Asset Diversification On CLO Performance, March 27, 2024
Daniel Hu, FRM, New York, + 1 (212) 438 2206, daniel.hu@spglobal.com
- Diversification spreads out risks across loan portfolios, which is important given the relatively long lifespan of CLO transactions. While portfolio diversity can mitigate idiosyncratic risks, too much diversity can also guarantee some exposure to the next troubled sector.
- CLO portfolio obligor diversity has doubled over the past 20 years, although the footprint of the most widely held issuers within CLO portfolios has declined as CLO 2.0s began to diversity into smaller issuers (many rated 'B-') around 2017.
- We analyzed reinvesting CLO portfolios during 2020 (year of the pandemic) as well as during 2023 (a period of slower economic growth) based on their levels of obligor and industry diversity.
- Overall, CLO transactions with low obligor and high industry diversity showed weaker performance during both time periods.
75. U.S. Structured Finance Chart Book: March 2024, March 27, 2024
Kohlton Dannenberg, Englewood, kohlton.dannenberg@spglobal.com
- Utility companies are increasingly using securitization as a financing tool to recover sizable costs from impactful, and oftentimes unexpected, events. Since 2021, utility securitization issuance has increased considerably alongside an uptick in wildfires and other severe weather incidents.
- The residual performance of auto lease ABS transactions we rate remains strong, reflecting the well-diversified pool mix. Our analytical approach provides for adjustments to our assumptions, if needed, as EV concentrations increase in rated pools.
- The criteria for SFR securitizations primarily address the likelihood that cash flow (whether from property generated rental income, liquidation proceeds, or other applicable forms) would be sufficient to satisfy amounts due to bondholders at the applicable rating levels.
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We published the latest "The Ratings View", which spotlights key developments and asset class trends on a weekly basis, on March 28.
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This report does not constitute a rating action.
Primary Credit Analyst: | David C Tesher, New York + 212-438-2618; david.tesher@spglobal.com |
Secondary Contacts: | Eunice Tan, Hong Kong + 852 2533 3553; eunice.tan@spglobal.com |
Jose M Perez-Gorozpe, Mexico City (52) 55-5081-4442; jose.perez-gorozpe@spglobal.com | |
Paul Watters, CFA, London (44) 20-7176-3542; paul.watters@spglobal.com | |
Joe M Maguire, New York (1) 212-438-7507; joe.maguire@spglobal.com | |
Yucheng Zheng, New York + 1 (212) 438 4436; yucheng.zheng@spglobal.com | |
Research Contributor: | Sourabh Kulkarni, CRISIL Global Analytical Center, an S&P affiliate, Mumbai; sourabh.kulkarni@spglobal.com |
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