Sector Roundup Asia-Pacific: Net Negative Bias Hits One-In-Five Oct 6. 2020 Primary Credit Analysts Key Takeaways Terry E Chan, CFA Melbourne − Overall: Our net negative outlook bias has worsened, emphasizing the potential significant number of downgrades still to come. + 61-3-9631-2174 [email protected] − Assumptions and risks: While a general recovery is now underway, we project it will take one to three years for most sectors to normalize. Christopher Yip Hong Kong − What to look for: Recurring waves of COVID-19 infections, which could lead to the re-imposition of government restrictions on travel and people movement. An uneven trajectory of business and [email protected] consumer demand could weigh on credit conditions. +852-2533-3593 Senior Analyst Sushant Desai The net rating outlook bias has slightly worsened to negative 19% (one out of five issuers) as of August 2020, from negative 17% in May 2020. S&P Global Ratings took a slew of negative rating actions on Asia-Pacific Research Analyst issuers, including outlook revisions and CreditWatch placements, over the past six months. More than one in Michelle Hsiung three corporate and sovereign issuers saw such actions from March to end-August 2020 (see charts 1 and 2). The nonfinancial corporate sector was the hardest hit with a net outlook bias of negative 25% (see table 1). Corporates are struggling with a slump in demand and continued uncertainty over business conditions. Financial institutions are facing a second-order effect with a negative rating bias of 17%. We calculate the net rating bias by deducting the percentage of negative outlooks and CreditWatch listings against the percentage of positive outlooks and CreditWatch listings. A minus figure indicates that the percentage of negative outlooks and CreditWatch listings exceeds the percentage of positive outlooks and CreditWatch listings; and a positive figure, vice versa. Chart 1 Asia-Pacific Issuers As Shaken As Europe’s Regional breakdown of actions on corporate and sovereign issuers due to COVID-19 and oil prices Percentage with rating actions Percentage no actions North America Latin America EMEA APAC 0% 20% 40% 60% 80% 100% The colors are based on percent impacted compared to total issuer population with the lighter blue indicating the most rating actions. Data as of Sept. 28, 2020. Source: S&P Global Ratings Research. spglobal.com/ratingsdirect Oct. 6, 2020 1 Asia-Pacific Sector Roundup Chart 2 Issuers Hit By COVID-19 And Oil Prices Rating actions by sector and region Data as of Sept. 28, 2020. The colors are based on percent impacted compared to total issuer population with the darker pink and purple indicating the most rating actions. Source: S&P Global Ratings' COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, published Sept. 29, 2020 S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. spglobal.com/ratingsdirect Oct. 6, 2020 2 Asia-Pacific Sector Roundup Table 1 Net Rating Bias Of Asia-Pacific Issuers By Sector, Aug. 31, 2020 Aug. Oct. Feb. May, Aug. No. of Notional 2019 2019 2020 2020 2020 entities average rating Auto OEM and suppliers -18% -17% -23% -71% -67% 36 BBB- Building materials 12% -6% 0% -13% -20% 15 BBB- Business services -23% -15% -8% -25% -36% 11 BB+ Capital goods -15% -15% -7% -15% -15% 39 BBB Chemicals -2% -18% -20% -30% -46% 35 BBB- Consumer products -18% -19% -20% -24% -21% 34 BBB- Diversified 7% 6% 13% -7% -13% 15 A- Hotels, gaming and leisure -25% -31% -25% -78% -67% 18 BB+ Media and entertainment -17% -29% -29% -22% -22% 9 BBB- Healthcare 0% -11% -38% -38% -38% 8 BB Investment company 0% 0% 0% 0% 0% 10 BBB+ Metals and mining -2% 2% -7% -24% -22% 55 BB+ Oil and gas -3% -9% -14% -34% -39% 28 BBB Project finance 0% 0% 0% 0% 0% 0 -- Real estate development -8% -12% -8% -11% -11% 82 BB- Real estate investment trusts 2% 2% -6% -25% -22% 51 A- Retail -5% 0% 0% -31% -38% 16 BBB- Technology -12% -19% -9% -17% -20% 41 BBB- Telecommunications -29% -30% -32% -26% -26% 27 BBB+ Transportation cyclical -14% -19% -10% -55% -40% 20 BB+ Transportation infrastructure -3% -2% -3% -37% -31% 62 BBB+ Utilities -2% -2% 3% -5% -6% 97 BBB+ Total corporates -7% -10% -9% -25% -25% 709 BBB- Financial institutions 12% 9% 8% -14% -17% 379 BBB+ Insurance 10% 11% 15% 1% -4% 180 A Public finance 17% 16% 17% 2% -10% 93 A+ Sovereign 9% 9% 12% 4% -10% 21 BBB Total issuers 2% 0% 1% -17% -19% 1,382 BBB+ Light blue colored cells indicate improvement from prior period, dark blue deterioration. Net ratings bias includes confidential ratings for all sectors with the exception of insurance and sovereign. Corporate. The sectors with the most negative net rating bias remain hotels, gaming and leisure; auto; chemicals; transportation cyclical; and oil & gas (see table 1). Most of these sectors are exposed to the consumer-led slump in demand arising from government-imposed restrictions (e.g. lockdown) and self- imposed reductions in economic activity. We expect very weak global car sales in 2020, with the prospect of recovery highly uncertain. Gaming activity bottomed in the second and the pace of recovery depends on travel restrictions, and consumer behavior. In the chemicals sector, spreads remain below mid-cycle levels as subdued demand persists. In transportation cyclical, COVID-19 disruptions to people flows and supply chains have caused a slump in demand in Asia-Pacific. Airlines remain the most exposed segment. For oil and gas, production cuts and an economic recovery, albeit uneven, are boosting oil prices but recent increases in new COVID-19 cases pose a threat to demand. spglobal.com/ratingsdirect Oct. 6, 2020 3 Asia-Pacific Sector Roundup Financial institutions. Our net rating bias is negative 17% as of August 2020. We have taken significantly high numbers of negative rating actions on banks and finance companies in Asia-Pacific in Q2 2020, reflecting our view that COVID-19 will hit lenders hard. We now expect many economies in the region to suffer deeper fallout than we previously estimated. Governments in many countries have struggled to control the outbreak and a vaccine is yet to be found. Consequently, we predict that credit losses will surge and earnings will fall across all banks in the region. In our view, most banking systems in the region won't stage a full recovery until 2023. Downside risks include a more severe or prolonged hit to the economies which could happen if the U.S.-China strategic confrontation intensifies or if COVID-19 threatens greater economic spillover than we assume now. High private sector indebtedness and still-high valuations could trigger a disorderly correction in asset prices, which would heighten and prolong the asset quality problems. Chart 3 Net Outlook Bias Distribution Of Asia-Pacific Issuers By Sector, Aug. 31, 2020 WATCHNEG NEGATIVE OTHER STABLE POSITIVE WATCHPOS Gaming, hotels and leisure Auto Healthcare Transportation cyclical Chemicals Retail Oil and gas Business services Media and Entertainment Transportation infrastructure Technology Telecoms REITs Consumer products Capital goods Public Finance Metals and mining Building materials Financial Institution Real estate development Sovereigns Diversified Insurance Utilities 0% 20% 40% 60% 80% 100% REITS--Real estate investment trusts. Source: S&P Global Ratings. spglobal.com/ratingsdirect Oct. 6, 2020 4 Asia-Pacific Sector Roundup Insurance. The net rating bias is negative 4% as of August 2020. This reflects volatile investment markets on weakening capitalization. Slower macroeconomic conditions present headwinds to growth. Rates were already in "lower for longer" mode; now it's "lower for even longer." This and volatile capital markets may prompt insurers to hike risk appetite in their hunt for yield. Foreign exchange (forex) volatility may affect Taiwan, Japan, and Korea players with big overseas investments. In addition, we anticipate insurers will review their actuarial pricing. Recurring waves of COVID-19 will prolong social distancing. This in turn displaces traditional insurance distribution channels (tied agency and bancassurance) as sales activities shifts online. Key risks include a flattening yield curve and revenue headwinds. International public finance. The net rating bias is negative 10% as of August 2020. The slow recovery continues to threaten economic growth and undermine fiscal positions of local and regional governments (LRGs). Australian and Japanese LRGs have higher budgetary flexibility to respond to spending challenges. China and India, in comparison, remain dependent on central government actions to revive the economy. Setbacks in containment could lead to further cuts to GDP forecasts for Asia-Pacific. Contagion fears will prevent travel and consumption, dragging down revenue for most LRGs, and some pandemic-sensitive public finance segments such as Australian universities. Sovereign. The net rating bias is negative 10% as of August 2020. Geopolitical tensions add to complications amid a sluggish recovery from COVID-19. Debt is materially higher for most sovereigns due to policies to support growth and employment. Prolonged low interest rates should ease countries’ financing burden in the absence of risk events. A sharp deterioration in investor sentiment in emerging markets could see swift reversals of capital flows out of these economies. The risk in abrupt reversals of capital flows is larger where, in response to lower global interest rates, governments ease domestic funding conditions to increase leverage in the public or private sector.