Moody’s: Corporate credit quality has bounced back from Covid
The quality of corporate credit has largely recovered five years on from the coronavirus outbreak that sent shockwaves through the world economy, according to a report by ratings agency Moody’s, but pockets of scarring remain.
Moody’s attributed the rebound back to pre-pandemic levels to “extraordinary” government
intervention and the rapid normalisation of conditions once the health crisis ended.
Rating drift, Moody’s proprietary measure of rating movement, is now broadly in line with historical averages, the agency said in a report.
Aggregate metrics like leverage and interest cover are back to 2019 levels, despite higher interest rates.
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In 2020, there were 218 defaults, the highest since the global financial crisis. But by contrast, the global financial crisis was marked by severe and persistent credit quality weakening that took longer to drift back, Moody’s pointed out.
However within the overall post-Covid rebound, credit stories vary by sector and rating class. In some sectors, the structural changes triggered or accelerated by the shock left lasting scars.
For example, speculative-grade credits – in Fitch and S&P’s long term rating scales denoted as BB and lower, with the equivalent in Moody’s scale Ba1 and lower – were hit harder than their investment-grade peers.
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Nearly 90% of companies Moody’s downgraded in the first year of the pandemic were speculative grade.
These lower rated corporate credits suffered more due to weaker liquidity, riskier business models, and higher refinancing risks.
In turn, these factors were brought on by greater vulnerability to revenue losses, supply chain disruption, and financial market instability.
They also felt the impact of rate hikes and stricter lending conditions more in 2022-23.
Investment-grade companies, by comparison, had stronger business models and lower debt to start with, and more fixed-rate debt, making them less affected by rising interest rates in subsequent years.
They were able to invest in growth, strengthen their competitive positions and gain market share from failing firms.
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Another Covid credit casualty has been the construction and building industry.
Despite being relatively unscathed by the first few years of the pandemic, it has fared considerably worse since then, driven mostly by downgrades of Chinese property developers.
The main causes of the downturn in China’s property market pre-date the pandemic – slowing growth, changes in government regulation, and excessive borrowing – but its impact on property sales and construction activity worsened the effects.
Key indicators show China’s property market has not yet bottomed out, the Moody’s report said.
Likewise fairing worse than average is consumer transportation.
A big bounce back in demand has meant earnings for airlines, railroads, parking and commuter transportation are ahead of 2019 levels.
But debt incurred at the beginning of the pandemic to shore up liquidity as earnings dropped and to finance investments to modernise equipment and fleets has weakened credit ratios in the sector.
The main rating drift winners are high tech sectors connected to the lasting switch to remote working.
