The Covid 19 crisis has re-written the playbook for crises in the financial and economic world. Crises are usually a build-up of excess in one form or another; too much overseas borrowing (1997-98), inflated tech prices (2000-2001), too much leverage and debt (2007-2008). And with each crisis there has been the “How come the experts missed this” and what were the credit rating agencies thinking? Not this time. This crisis is a virus and impacts humanity with tragic consequences – and allows the ratings agencies to respond to events as they unfold.

So on Friday S&P did not change their BBB rating on Italy which was already on negative watch. Given the impact of the virus is likely to shrink the economy by 10% and take debt up to 155% of GDP it might be reasonable to say S&P were being charitable, possibly even political. But elsewhere the debt picture is equally gritty and the agencies are being less charitable, indeed, the number of negative rating actions across the corporate and structured world has increased materially since the beginning of March, with agencies giving little benefits and indeed credit to large swath of their rated universe.

The focus for markets to date has been on the quantum of ratings migration. With over $150bn of investment grade debt exiting the IG market to become high yield these “fallen angel” issuers have already topped the number in 2009.  Whilst Ford and Occidental Petroleum are the largest components there are expectations that this number will top $300bn by year end. With fallen angels exiting the Investment Grade market there could, mechanically, be an improvement in quality; in reality the nature of this crisis means there will be further debt issuance and more BBB issuance – so that is not to be. But the High Yield market is likely to increase by well over 25% as the fallen angels enter its universe.

So what should we expect from the rating agencies? Whatever construes a lenient approach should not be expected. Paradoxically, in an odd turn of events regulators such as the Bank of England are suggesting banks should be less prudent in provisioning to ensure they are not “clogging up” their capital; against this banks are likely to see 100% government guaranteeing of SME loans – none of this makes for a straight forward assessment for the agencies. And whilst banks and insurance companies hold a special place in the financial plumbing, the airline, hospitality and retail sectors do not.

Whilst support may be forthcoming for national champions such as Air France, the rating agencies tackled grounded fleets with downgrading the likes of IAG and Ryanair way back in late March. Issuers such as IHG (Intercontinental hotels) and Next have also been placed under review. Their ratings are in hand of government’s lock down trajectories and whatever is the new normal for industries figuring how social distancing works with customers they used to herd.  So far for this crisis the rating agencies are up with events but we are barely two months into the crisis and uncertainty still prevails.  Rating agencies decisions are not without material implications or cost for issuers – and themselves.

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