Energy (oil & gas) and natural resource companies made up 33% of downgrades, excluding sovereign related, during 2015, according to Fitch Ratings.
Persistently weak oil prices have continued to lead to capex reductions or delays and have been a primary driver for weakened investment and sub-investment-grade credit profiles globally, the credit ratings agency said.
In addition, Brazilian corporates had the highest number of downgrades for a country at 48 and made up approximately 75% of the Latin American portfolio downgrades in 2015. These actions, some multi-notch, have been across all rating levels and different sectors. The risk of further downgrades hang over Brazilian corporates, demonstrated by both the negative outlook on the Brazil sovereign and approximately 50% of the Brazilian corporate portfolio having a negative rating outlook or watch.
Negative sentiment towards commodities
Prolonged weak oil, gas and commodity prices have triggered various revisions to Fitch’s commodity price decks, which, combined with liquidity concerns and management reaction for some entities, have led to rating downgrades. Operational/industry factors primarily drove downgrades for the natural resources (metals and mining) sector, which made up 15% of downgrades (excluding sovereign related). Overcapacity of supply, reduction in Chinese demand and idiosyncratic reasons such as Chinese dumping of steel have kept commodity prices low. In addition, investor sentiment toward commodities is deeply negative and is likely to remain so into the first half of 2016, affecting commodity sectors such as copper and nickel.
Non-financial corporate downgrades exceeded upgrades by 2 to 1 (x) for 2015. The number of issuers downgraded, excluding duplicates, in Fitch’s corporate portfolio went up to 207 in 2015 from 125 in 2014, a 66% increase. In comparison, the number of upgrades increased modestly from 96 in 2014 to 104 in 2015, an 8% increase. The energy (oil & gas), natural resources, building materials & construction and utilities sectors drove approximately 70% of the increase in downgrades. For the commodity-related sector, approximately 50% of the increase, the pressure from lower-for-longer commodity prices has weakened credit profiles beyond Fitch’s original through-the-cycle expectations.
The rating agency said that the purpose of Fitch’s projections is not to predict the actual commodity price but to provide a range of foreseeable operational and financial profiles within the rating time horizon commensurate with a rating, which is expected to survive the inherent cyclicality of the sector including its commodity price fluctuations. As a result, Fitch aims to assign cyclical companies ratings that have enough headroom to enable them to remain broadly stable during the sector’s inherent cyclical peaks and troughs, not assigning ever-changing, pro-cyclical ratings.
In 2015, approximately 45% of corporate upgrades were in North America, with most (80%) driven by an improvement in the operations/industry environment. This reflects the stronger recovery in the US than in other countries and Fitch’s forward-looking expectations for improved operating performance consistent with its guidelines.