Twenty-three percent of North American high yield corporates have experienced, or are likely to experience, material damage from the coronavirus pandemic, while 36% have low rating headroom relative to their negative rating sensitivities, according to a new Fitch Ratings report.
"With almost a quarter of Fitch's North American Speculative Grade portfolio in sectors that have high exposure to the coronavirus pandemic and over a third with low rating headroom, we expect meaningful rating migration," said Michael Paladino, managing director.
About 10% of North American high yield corporates are highly vulnerable to the coronavirus pandemic fallout, have low rating headroom, and represent a meaningful portion of the portfolio at risk of downgrades. Twenty-five percent of high yield issuers are facing medium sector exposure and medium rating headroom, while 18% face low rating headroom and medium sector exposure.
Issuers in the 'B' rating category are especially at risk of downgrades due to high sector exposure and low rating headroom. Fifty-six percent of issuers are rated 'B'. Those rated 'BB' comprise 32% of the portfolio, while 11% were in the 'CCC', 'CC' and 'C' categories.
Unexpected tailwinds result in fast thinning of the cushion that separates 'B-' from the 'CCC' level, where issuers have little-to-no control over their financial condition. Of the 165 B- rated issuers, 60% were Middle Market and Lower Middle Market and face unexpected negative developments due to their small scale, coupled with low diversification and customer concentration.
Issuers in Airlines, Gaming, Lodging & Leisure, Non-food Retail, Oil & Gas, Restaurants and Metals & Mining are most vulnerable to the repercussions of the coronavirus pandemic.
It remains to be seen how impactful government intervention will be for issuers in these heavily affected areas of the economy, as the details of the program are still being worked out.
Thirty-six percent of ratings have low headroom, indicating the high likelihood of a negative rating action. Of the sectors most exposed to the coronavirus pandemic, 50% of Airlines, 47% of Oil & Gas, and 44% of Restaurants face low rating headroom.
Oil & Gas is especially vulnerable. The coronavirus pandemic has taken a toll on demand. On the supply side, oil prices have been severely pressured by the output dynamics on the heels of geopolitical tensions between Russia and Saudi Arabia.
Only 29% of issuers in the 'B' category with high exposure have more than 10% of their debt due by 2021. Approximately 43% of 'CCC' issuers susceptible to coronavirus related disruptions have debt service obligations totaling at least 10% of total outstanding debt due by 2021.
A total of 686 North American issuers were analyzed, each with a 'BB+' or below rating and a Fitch Public Rating, Private Rating or an Analyst Credit Opinion. The analysis is based on data as of March 27, 2020.