Will Multiple Credit Rating Downgrades Materialize This Year?

Increased Downward Pressure on Aviation, Distribution, and Cinemas
Financial Improvement Dependent on Vaccine Introduction Likely to Determine Rating Direction

[Asia Economy Reporter Minji Lee] As the number of companies with a red light on their credit rating outlook has increased significantly compared to previous years, there is growing interest in whether a wave of credit rating downgrades will materialize this year. The affected industries include airlines, retail, and movie theaters, which have experienced prolonged business slumps due to the spread of the novel coronavirus infection (COVID-19). It is expected that the direction of ratings will be determined by whether financial structure improvements occur following the introduction of vaccines.

On the 12th, Korea Credit Rating Agency presented a negative long-term rating outlook and watchlist for 51 companies as of the end of last year. Accordingly, the indicator dividing upgrade outlooks by downgrade outlooks fell sharply compared to previous years. After recording 0.79 times in 2017, 0.75 times in 2018, and 0.68 times in 2019, it dropped significantly to 0.24 times last year as the number of companies with downgrade outlooks increased. The situation was similar elsewhere. Korea Ratings presented a negative outlook for 30 companies in 2019, but this rose to 51 companies last year. NICE Credit Rating expanded from 28 companies in 2019 to 64 companies last year.

The increase in negative outlooks means that many companies could face credit rating downgrades during the regular evaluations in April-May this year. Especially, companies listed on the watchlist are highly likely to have rating adjustments. The reason for the increase in negative outlooks last year was the impact of COVID-19. While some companies expanded demand through untact (non-face-to-face) methods despite the COVID-19 situation, others faced difficulties in raising funds due to demand contraction and financial market instability. As these companies failed to quickly adapt to the changed industrial paradigm, their financial statements deteriorated rapidly, which is interpreted to have affected credit rating outlooks.

Kyung-hwa Lee, Research Fellow at NICE Investors Service’s Evaluation Policy Headquarters, explained, "Although expectations for a full-scale economic recovery after the second half of this year are rising due to the distribution of COVID-19 vaccines, the speed of recovery will vary by industry. Downward pressure will increase mainly on industries with delayed or slow recovery and companies with reduced capacity to bear accumulated financial burdens due to performance declines."

Air transportation, movie theaters, retail, auto parts manufacturers, and steel industries are major sectors where credit rating agencies expect increased downward pressure. For airlines, hotels, and movie theaters, COVID-19 has directly affected industry demand, so even with vaccine distribution, uncertainty remains regarding the extent and speed of performance recovery. Auto parts manufacturers, steel, refining, and chemical industries face uncertain rating outlooks due to demand decreases caused by COVID-19 and price drops resulting from crude oil price plunges. Although performance will be affected by the level of trade conflicts between the U.S. and China and raw material price fluctuations, these industries are expected to show rapid recovery if economic recovery accelerates with vaccine distribution.

Jae-heon Choi, Senior Expert at Korea Ratings’ Evaluation Standards Office, said, "Although a gradual recovery is expected based on active economic stimulus policies by various countries, the resurgence of COVID-19 centered on major advanced countries at the end of last year means there is no industry that can be said to have a favorable business environment this year. Even the construction industry, which saw credit rating upgrades last year, faces increased housing market uncertainty, so rating directions will change depending on individual companies’ response capabilities."

This content was produced with the assistance of AI translation services.