March 25, 2020/Fitch Ratings
Almost 40% of APAC corporates operate in sectors that have ‘Moderate’-to-‘High’ levels of exposure to the effects of the coronavirus outbreak, and have ‘Low’ or only ‘Moderate’ rating headroom at their current ratings, based on a review of Fitch Rating’s 316 publicly rated corporates in the region. Specifically, 15 corporates (4.7%) are in the category with ‘Low’ rating headroom and ‘High’ sectoral exposure to the effects of the pandemic, most of which have speculative-grade ratings.
The full scale of the pandemic’s effects will take time to become clear, but some of the most exposed APAC sectors are already seeing a significant impact, with airlines being one of the most obvious. In the metals & mining sector, nine out of 12 corporates are assessed with ‘High’ exposure – essentially those that are thermal coal producers. Exposures are also notable for corporates in the retail, leisure and consumer products (RLCP) and automotive sectors, but vary according to circumstances. In retail, for example, department store operators will be more affected than online retailers. Hotel operators and those in gaming (casinos) are also in the most affected category. In addition, the slump in oil prices will weaken the cash generation of oil and gas producers, and we have assigned a COVID-19 exposure level of ‘High’ to all 23 of our publicly rated energy (oil & gas) corporates in APAC.
As well as assessing sector risk, we categorised companies by examining how close they were to breaching their issuer-specific negative rating sensitivities (typically leverage, but not always) prior to the COVID-19 pandemic. If such parameters are breached for a sustained period, this could increase the risk of negative rating action for an issuer compared with its sector peers. Issuers with ‘Low’ headroom may not experience any rating impact if our expectations for deleveraging are unaffected or only slightly delayed by the effects of the coronavirus, provided these issuers can also maintain sufficient financial liquidity. Conversely, if an issuer with ‘High’ headroom is severely affected and unable to mitigate the risks, then its headroom could be consumed fairly quickly.
Breaking the data down reveals that issuers in sectors classified as having ‘High’ COVID-19 exposure do not necessarily have ‘Low’ rating headroom. Notably, the majority of corporates in the energy sector, all of which have ‘High’ exposure to COVID-19, have ‘High’ rating headroom. Conversely, most corporates in the telecoms sector, which have predominantly ‘Low’ COVID-19 exposure, have either ‘Low’ or ‘Moderate’ rating headroom. In terms of ratings headroom, the property sector dominates the riskier categories, with 20 firms in the sector being assessed as with ‘Low’ headroom and a further 38 only ‘Moderate’.
Among the 36 issuers who are currently rated at ‘BBB-‘ , 13 are in sectors that have ‘Moderate’ to ‘High’ levels of exposure to the effects of the COVID-19 outbreak and have ‘Low’ or only ‘Moderate’ rating headroom at their current ratings.
The coronavirus outbreak poses a significant challenge to rated corporates. The speed of recovery and companies’ ability to recoup lost revenue and manage liquidity will be critical in our assessment of the need for rating action. In line with our “rating through the cycle” approach, ratings will be driven by an issuer’s expected profile by end-2021 rather than at the trough of the crisis, provided that liquidity is sufficient. However, for the weaker issuers, shorter-term liquidity factors could also be a driver of rating action.