Downgrades outnumbered upgrades across our global non-financial corporates portfolio during 4Q22, but regional net rating activity trends varied with respect to pace, sector and key factor, Fitch Ratings says. Additionally, downgrades were concentrated among speculative-grade issuers, which are generally more susceptible to the economic slowdown, high inflation and rising interest rates.
There was a modest acceleration in downgrade activity in North America (NA) and European developed markets (EDM) , but the pace of downgrades decelerated in Asia Pacific (APAC) during 4Q22. Downgrades were mostly in the technology, media and telecom (TMT), retail and consumer, and healthcare sectors in NA during the quarter. EDM downgrades were predominately in the retail, leisure, consumer products and TMT sectors, while homebuilders and the real estate sectors accounted for most downgrades in APAC. Although downgrades outnumbered upgrades in APAC last quarter, they were the lowest since 1Q21.
The primary factor driving negative rating actions was different for each region. Liquidity risk was the most frequent downgrade driver in APAC last year, including during 4Q22. NA downgrades were also consistent throughout 2022 but were mostly tied to financial profile changes. For EDM, “sector-wide market changes” tied with “changes in market positions versus competitors” as the most frequent downgrade driver during 2022, and the latter was the most frequent key driver for 4Q22 downgrades.
Although smaller in number, there were selective ratings upgrades in each region during 4Q22. Positive actions were generally due to idiosyncratic factors for each issuer. However, several regions saw upgrades within natural resource and commodity-related sectors as elevated commodity prices bolstered cash flows, enabling debt reduction and balance sheet improvement.
Ratings Outlook distributions are comparable across NA, EDM and APAC, with roughly 80% Stable, 12% Negative and 8% Positive as of Dec. 31, 2022. However, weakening macroeconomic conditions could pressure operating performance and recent rating and Outlook revision trends imply some downward risk exists, particularly in NA and EDM.
The NA and EDM regions showed a modest sequential increase in Negative Outlooks during 4Q22, despite ending last year unchanged from 2021. Conversely, in APAC the percentage of Negative Outlooks declined sequentially in each quarter during 2022, due to Outlook revisions, rating withdrawals and issuer ratings linked to India’s sovereign rating, which Fitch stabilized last June.
The COVID-19 pandemic and war in Ukraine caused the percentage of downgrades across our global portfolio to spike in 2020 and 2022. While the percentage of global corporates downgrades exceeded upgrades in all but one month in 2022, the distribution of Outlooks and current trends suggest similar spikes are not likely in the near term.