How Ratings Fared in Lockdown Compared to Prior Crises

Global Lockdown Saw Fewer Downgrades and Fewer Defaults Than Prior Crises

The COVID-19 pandemic is not yet over, and the economic impact will be felt for years to come.?Most negative rating action directly related to the crisis has, however, already taken place, and new drivers have replaced the pandemic for most current rating actions.?

With something of a line drawn under the pandemic’s direct impact, we can already try to answer the question – just how much rating damage did the pandemic (or, more accurately, the series of economic lockdowns) do to the global portfolio??And how does that compare to previous crises?

We compared lockdown to the two largest preceding crises in recent times – the Global Financial Crisis (GFC) of 2007-2009, and the Eurozone crisis of 2010-2013*.?As our target period for the pandemic, we looked at rating actions between January 2020 and April 2021, by which time the main lockdowns had ended, and rating reviews largely ceased being pandemic-driven.?As a very simplistic measure of rating impact, we measured the average notch difference at period start and period end for all ratings outstanding in the asset class.?We focused exclusively on rating changes.

Worst Fears Avoided So Far

That snapshot shows a much more positive outcome than was expected at the start of the pandemic, with ratings overall holding up notably better than during the two prior crises.?Financial institutions, structured finance and even corporates suffered notably more rating deterioration in the GFC than in lockdown.?The majority of pandemic actions ultimately stopped at Outlook and Watch revisions, with many now reverted to their prior condition.?

The regional picture in prior crises also varied more starkly.?US bank ratings suffered far more in the GFC, with over a notch-and-a-half given up, almost three times the impact in Europe.?The GFC’s impact on US banks was also twice the impact of the ensuing Eurozone crisis on EMEA’s banks.?Structured finance rating actions varied sharply by sub-sector, in both prior crises, influenced by volumes – for example, the heavy volumetric weight of RMBS actions during the GFC pulled down the portfolio average rating for US Structured Finance despite a less dramatic performance picture in ABS and CMBS.?

Global Pandemic Leads to Global Actions

The picture in the pandemic, in contrast, was not just more resilient, but also more globally consistent, with no asset class falling as much as a full half-notch.?Structured finance in fact posted a modest overall net positive shift in ratings, heavily influenced again by the high volumes of seasoning US RMBS transactions, whose potential delinquencies were additionally flattened by the level of government support to the population.?

Government Largesse and Late-cycle Exuberance

Government largesse is the single-biggest factor behind the surprisingly positive outcome.?Not unrelated, sovereigns posted their weakest rating performance of all three crises during the pandemic, and we see significant challenges in fiscal improvement in the near-term.?Most sovereign downgrades, other than the UK and Italy , centred on emerging markets, with negative outlooks the primary action affecting developed markets such as Belgium and Australia (both since reversed) and France , Japan and the US (still in place).

But the flipside of accommodative government support has been a reversion to the late-cycle exuberance we saw before the pandemic commenced. Lockdowns have simply paused the downturn from the current long-run leveraging cycle, not reduced the ongoing risk.?

And that may ultimately be a bigger challenge to credit ratings than even a global pandemic.

For more on the lookback at Fitch's ratings during the pandemic, visit our cross-sector summary , and for current rating actions, our public website at fitchratings.com .

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*All of these observations come with the hefty caveat that the three crisis periods are not directly comparable in length or broader context.?Each of the three crises cover a different time period, and will have a slightly different cohort of rated entities.?Each period’s observations will also include the results of non-crisis driven actions (e.g. M&A) in the ordinary course.?

For example, for corporates, the shorter pandemic observation will give a deeper rating cut as a result of excluding reversals after March 2021, but that will be offset, compared to the GFC and Eurozone crises, by excluding the higher number of secular, non-crisis driven downgrades of those longer observation periods.?

For its part, the composition of the global structured finance portfolio has shifted materially over the three crises, most notably in a shift from pre-GFC re-securitisations in structured credit to more recent CLOs featuring more stable corporate loans as collateral.?

Nonetheless, as an overall indicator of order of magnitude, the crisis comparison provides an interesting snapshot.??