The COVID crisis saw dramatic increases in global credit risk throughout 2020, but signs of recovery have emerged in the last 12 months. In 2021, credit upgrades outnumbered downgrades by 3:2.
Corporate credit risk improved by 6% in 2021 after plummeting by 20% the prior year. Financials showed weaker improvement at just 1%, though had less ground to recover with a drop of 10% the previous year.
Global Corporates are creeping back to majority investment grade, with an increase from 42% to 49% – this sat at 50% pre-pandemic.
African Sovereigns continued to feel the strain in 2021, growing in credit risk by 10%. Globally, Sovereign credit risk was broadly stable.
The US economy flexed its muscles, leading corporate credit recovery at 11%, while the UK languished with a modest recovery of 1.6%. EU corporates showed a moderate recovery rate of 4%.
Travel & Leisure companies felt the COVID crash more than most, and after a disastrous 2020, continued to increase in credit risk by a further 20% in 2021. As borders reopen and restrictions ease, the sector has started to show signs of late improvement – but no such luck for UK firms.
Argentina, China and Canada stood out as high performers with the strongest bias towards upgrades. Middle Eastern countries including Oman, Kuwait and United Arab Emirates struggled in comparison, with significantly more downgrades than upgrades.
Rising Stars outnumbered Fallen Angels in 2021, with almost twice as many corporates upgrading from high yield to investment grade (13%) than in the opposite direction (7%). Amidst the online office boom sectors like Technology Hardware & Equipment flourished with 32% of entities achieving Rising Star status, while the beleaguered Travel & Leisure sector saw 21% of all firms descend as Fallen Angels.
The banking industry has retained strength throughout the pandemic but there are signs of deterioration within emerging markets such as Mexico and Turkey, as well as in South Africa.
Figure 1: Annual credit risk changes by sector
Figure 1 shows the annual credit risk changes in sectors in 2021. Credit quality of most sectors improved in 2021. Global Leisure Goods, Industrial Metals & Mining and Technology Hardware & Equipment experienced the largest improvement with credit risk decreasing by more than 13%. 2021 remained difficult for Travel & Leisure (risk increased by a further 20%) and Aerospace and Defence (risk up about 5%).
2021 will hopefully mark the beginning of the end for COVID. New variants brought continued restrictions, but the vaccine effort was a phenomenal success.
Despite empty city centers, supply chain disruptions and labor shortages, many major economies bounced back, in some cases exceeding their pre-COVID GDP levels.
Some areas continued to struggle – Travel & Leisure, Developing Economies, Aerospace. But the expected widespread increase in corporate defaults has not yet materialized, although the costs of tackling COVID are now being felt in rising prices and higher interest rates.
Consensus ratings were downgraded in 2020, and they remain below their pre-pandemic levels.
But Government support has meant widespread upgrades in 2021 – and on average slightly faster than the main rating agencies.
This report shows the key credit trends that emerged in 2021 and examines which geographies, industries and sectors proved resilient to the widespread deterioration brought about by COVID in 2020 – and which have a more difficult road ahead.
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