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The Risk of Default Is Rising
The number of defaults in 2022 worldwide remains low alongside the outlook for long-term defaults. But the risk of near-term defaults appears to be rising in certain regions.
Having entered this year with strength on the back of the solid global economic recovery and favorable financing conditions, credit markets are now confronting pressures from myriad coalescing factors, according to S&P Global Ratings. The positive credit momentum of the proceeding 14 months has stalled, with ratings downgrades outpacing upgrades for the past four weeks. Financing conditions are tightening, and debt issuance has slowed 17% year-over-year. Credit spreads are widening, in a signal of how investors are becoming more risk-averse. While the global 12-month trailing speculative-grade default rate remains at a low 1.5%—and the number of defaults year-to-date are at their lowest levels since 2014 despite quarter-over-quarter totals inching upward—the rising risk of corporate and sovereign defaults across the U.S., China, and Russia are contributing to concerns about a meaningful turn in the credit cycle.
“The number of weakest links (issuers rated ‘B-’ or lower by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications) rose in March—and this was the first increase since June 2020. Issuers in Europe and EMEA affected by the Russia-Ukraine conflict led the increase in weakest links,” S&P Global Ratings said in recent research. “Weakest links default at a rate that is 8x higher on average than overall speculative-grade population, suggesting that we can expect the number of future defaults to rise.”
In the U.S., market volatility and rising yields appear to reflect the uncertainties surrounding the Federal Reserve’s monetary policy changes, rather than the Russia-Ukraine conflict. American companies in the have reduced their debt levels for the 2022-2023 period, securing lower rates and longer funding commitments. Nonfinancial speculative-grade maturities won’t peak until 2028, when $573 billion in debt comes due, according to S&P Global Ratings. However, S&P Global Rating anticipates the U.S.’s default rate will swell from the current 1.5%, to 3% by year-end. Despite the first quarter’s corporate bankruptcy filings marking the lowest levels in at least 13 years, the risk of default for every U.S. business sector besides energy and utilities recorded a higher year-over-year score in the first quarter, according to an S&P Global Market Intelligence analysis.
In China, the residential market may be changed by the ongoing property market downcycle—and more defaults are still to come, according to S&P Global Ratings. In the aftermath of the country’s largest developer, Evergrande, defaulting last year and following the recent policy crackdown on the country’s residential market, the year ahead will see rated Chinese developers confront $18 billion in maturing debt, the likelihood that national home sales may shrink 15%-20%, and tighter liquidity leading to greater insolvency and raising defaults.
In Russia, sanctions implemented by the international community are compounding credit risks for the country. Because the Russian government made coupon and principal payments on its dollar-denominated Eurobonds in rubles when those payments were due on April 4, S&P Global Ratings on April 8 lowered its unsolicited foreign currency issuer credit ratings on Russia to selective default, from 'CC/C'.
“Mounting challenges will likely weigh on the credit outlook for the rest of the year, depending, in large part, on the evolution of the [Russia-Ukraine] conflict,” S&P Global Ratings said in its second-quarter global credit conditions research. “It’s likely that global defaults will increase this year, perhaps beyond our baseline forecasts of 3% in the U.S. and 2.5% in Europe by December.”
Today is Tuesday, April 12, 2022, and here is today’s essential intelligence.
Written by Molly Mintz.
Economic Research: U.S. Real-Time Data: Omicron Wanes, Supporting Consumer Spending Despite High Prices
Extreme pricing pressure, worsened by the Russia-Ukraine conflict, continues to weigh on the U.S. economy, but signs of an omicron retreat have provided some relief. With improving public health conditions, S&P Global Ratings’ measures for U.S. mobility and social activities have risen. Google community trends, seated diners, air traffic, and hotel occupancy rebounded sharply through early April from their January lows. Prices for raw materials, energy, and seaborne transportation remain elevated, mainly owing to the Russia-Ukraine conflict and long-lasting global supply chain disruptions. Gas prices—at $4.17 per gallon for the April 4 week—are just under the all-time high.
—Read the full report from S&P Global Ratings
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China's Biggest Banks Face Slower Earnings Growth In 2022 Amid Macro Headwinds
Major Chinese lenders will likely report slower net profit growth in 2022 as an uncertain economic outlook weighs on loan growth and net interest margins. The aggregate net profit of China's commercial banks will likely grow by around 10% in 2022, compared with 12.6% in 2021, according to estimates by Bank of China Research Institute. Despite lower rates and lackluster capital markets dragging down net interest margins and fee growth, respectively, and rising credit risk for the real estate sector, J.P. Morgan said the outlook for Chinese banks is "net positive, as management are guiding for stable profit growth and asset quality trend in 2022."
—Read the full article from S&P Global Market Intelligence
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Trade Review: Asian Steel, Scrap Prices Seen Firm In Q2 As War-Led Supply Crunch Continues
Prices in Asia's hot-rolled coil, rebar, and ferrous scrap markets are likely to remain strong in the second quarter, after surging in Q1, as supply chains are gradually restored and markets continue to price in the impact of Russia's invasion of Ukraine. Suppliers in India, Japan, and South Korea have increasingly focused on European steel markets in the wake of the invasion, while Chinese mills are emerging as dominant suppliers in Asia. This trend is likely to continue in Q2 after the EU increased quota volumes for HRC imports from India by 62% and from South Korea by 27% from April 1.
—Read the full article from S&P Global Commodity Insights
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GCC Sustainability Targets Are Unlikely To Shake Up Local Energy Markets
Gulf Cooperation Council energy players' spending on sustainability is picking up but will not contribute materially to cash flow over the next five years, in S&P Global Ratings’ view, despite a greater focus on environmental targets in the region. We believe the slower spending pace stems largely from regional energy companies being significantly more shielded than global peers' to energy transition risks as well as the currently lower returns on green and renewable projects. The sector's sustainable debt issuance is also unlikely to see a strong uptick, in its view, due in part to fewer suitable projects being undertaken by the sector.
—Read the full report from S&P Global Ratings
Energy & Commodities
Listen: Groups Sue Interior For Documents Behind Federal Oil, Gas Leasing Report
President Joe Biden's executive order on tackling the climate crisis, among other things, launched a review of existing fossil fuel leasing and permitting practices. Climate and conservation groups had hoped the review would drill down into federal oil and natural gas leasing activity's impact on climate change, but the report issued Nov. 26 was mostly silent on climate. Now, groups represented by the Western Environmental Law Center are suing Interior to find out if the report was scaled back to court political favors. Senior editor Jasmin Melvin spoke with WELC executive director Erik Schlenker-Goodrich about Interior's report, what groups hope to achieve from their lawsuit, and how prices at the pump and geopolitical pressures are playing into this debate.
—Listen and subscribe to Capitol Crude, a podcast from S&P Global Commodity Insights
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Technology & Media
How Autonomous Trucks Will Transform Landscape Of Logistics Industry
The logistics industry is going through profound changes with digitalization and other technological advances that have the potential to decrease substantially the cost of transporting goods over land. Although autonomous passenger cars are receiving the most attention, autonomous technology is expected to have a greater impact on the global trucking and logistics industry. Autonomous trucks are gaining a great deal of traction in the transportation industries because of a growing shortage of drivers, improved efficiency, and increased safety.
—Read the full article from S&P Global Mobility