Fitch Ratings' review of nearly 180 global non-bank financial institutions (NBFIs) since March in response to the coronavirus pandemic found balance-sheet intensive business models face greater pressure in 2020 than more balance-sheet light counterparts, given the effects on asset quality, capital and access to funding. The increased risk to operating environments and market conditions resulted in 106 negative ratings actions; 67 were related to standalone issuers (representing 70% of standalone NBFI ratings reviewed and 52% of total public NBFI standalone ratings on the international scale), and 39 were related to supported entities.
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Under Fitch's latest "Global Economic Outlook" base case, global GDP will drop by 4.6% in 2020, with U.S. GDP declining by 5.6%, before beginning to recover in 2021. Downgrades have related to NBFI sub-sectors where Fitch believes coronavirus stress could exceed a normal cyclical downturn and/or individual issuers that entered the pandemic with more limited headroom in their ratings. The Ratings Watch Negatives (RWNs) signal more immediate potential rating pressure typically as a result of weaker liquidity positions, sizable near-term debt maturities, covenant pressure, more limited capitalization headroom, and/or more vulnerable business/asset segments.
Negative rating actions reflect concerns about asset quality deterioration, earnings pressure and stability, funding and refinancing risk, elevated leverage and/or actual or imminent covenant breaches. Consumer and commercial lenders and equipment leasing businesses face pressure on the asset side of the balance sheet (in terms of asset quality deterioration) as well as the liability side of the balance sheet (in terms of frequent needs for funding access amid volatile market conditions).
Fitch has taken 18 negative rating actions on standalone consumer finance companies, which are expected to experience asset quality deterioration as unemployment levels increase, pressuring consumers' ability to service their obligations. Affected consumer lending activities include auto lending, credit card lending, student lending, mortgage lending, secured lending, online lending, microfinance and debt purchasing.
Fitch has taken 17 negative rating actions on standalone equipment lessors; six were related to aircraft lessors and 11 were related to truck lessors, fleet lessors or equipment rental companies. The pandemic has pressured equipment utilisation rates, lease collections and cash flows for most equipment lessors, particularly for aircraft lessors. Key near- to medium-term rating sensitivities, aside from liquidity management, include the pandemic's effect on operating cash flow given increased lease deferrals, moratoriums and/or defaults, the impact of potential lessee bankruptcies, equipment repossessions and higher potential leverage due to impairments.
Fitch has taken 12 negative rating actions on standalone commercial lenders, with rating actions primarily concentrated in the U.S. and more specifically related to business development companies. Spread widening has resulted in unrealised portfolio losses and material increases in revolver draws, which has increased leverage, pressured debt covenants and reduced balance sheet liquidity. Key near- to medium-term rating sensitivities include the degree of credit risk mitigation through active intervention with borrowers and sponsors, the ability to sustain targeted leverage such that debt covenant cushions are commensurate with the risk profiles, maintaining sufficient liquidity to support portfolio companies, and covering dividend payments.
Conversely, many balance sheet light NBFIs have been unaffected or have even benefited from recent market conditions. This includes financial market infrastructure companies and securities firms benefiting from increased trading volumes and wider bid/ask spreads. However, this has been partially offset by balance sheet light NBFIs experiencing lower market-based fee income (i.e. traditional investment managers) and sluggish M&A activity (i.e. advisory firms), which have been more adversely affected.