As the coronavirus spreads across the globe, real economic effects are starting to emerge, and not just in the travel industry. For example, on Wednesday, IDC said its forecast for information technology spending this year would most likely be adjusted downward, to as low as 1% (versus the original projected 4%) in the worst-case downside scenario.
“Based on data indicators in the first quarter, IDC expects to see a significant slowdown in spending on hardware in particular during the first half of 2020 with software and services spending also affected as the crisis reverberates through all sectors of the economy, including supply chains, trade, and business planning,” the research firm stated.
The production and pricing turmoil in the global oil markets and the volatility in equities mean corporates face a three-pronged threat. Many will have to survive on thinner equity cushions and will draw down their credit lines. The overall effects could tip companies with speculative-grade credit ratings, many of whom were already facing secular industry headwinds, into crisis and even bankruptcy.
While a wave of defaults is not imminent, credit rating agencies are beginning to foresee problems for some companies, so downgrades and credit-watch alerts are accelerating. The amount of corporate debt rated speculative could climb: about one-half of the $6.6 trillion investment-grade corporate bond market is rated “BBB,” the lowest category before falling into speculative-grade, or “junk-bond” status.
Moody’s said on Wednesday that it had raised its baseline corporate bond default rate projection for year-end 2020 to 3.6% from 3.4%, “based on rising risks to growth, commodity prices, and financial markets amid the coronavirus outbreak.” Under a more pessimistic scenario, the default rate would go up to 9.7%, the credit rating agency stated.
To track the corporate downgrades and companies put on negative credit watch, as well as industry-specific credit concerns, CFO will be regularly posting news of credit rating moves and warnings from the major agencies.
Standard & Poor’s downgraded Sabre, the travel technology solutions company, to “BB-” on increased leverage from elevated technology spending. S&P said the downgrade reflects its view that Sabre’s adjusted net leverage will increase above 6x in 2020 from 4.1x in 2019. The causes? The company’s planned $150 million of incremental technology spending and the expected declines in travel volume related to the coronavirus. Sabre says the global health crisis related to the coronavirus (COVID-19) will dent first-quarter EBITDA by $50 million to $80 million. Sabre had EBITDA of about $216 million in the opening quarter of 2019.
S&P downgraded discount retailer Big Lots to “BB+” from “BBB-” on what it said was the company’s weakening competitive position. “We believe the company’s value proposition has diminished particularly in recent quarters, due to a function of changing merchandising strategies, inconsistent execution, and fiercer competition,” S&P stated. S&P also lowered the issue-level rating on the company’s $700 million revolver to “BB+” and assigned it a “3” rating. Lenders could expect meaningful (50%-70%) recovery in the event of a payment default, according to S&P.
With the COVID-19 outbreak causing businesses and groups to cancel travel and ban nonessential travel, and many leisure travelers canceling or postponing plans, lodging companies could also be in trouble. For purposes of modeling the impact of the coronavirus, S&P Global Ratings is assuming that U.S. revenue per available room (RevPAR) will decline meaningfully in March, and 20% to 30% in the second quarter. That could result in a full year 2020 RevPAR decline of 5% to 10%, depending upon the pace of recovery after the second quarter, S&P said.
Fitch Ratings said on Wednesday that more U.S. restaurants are facing distress and possible bankruptcy.
Default volume is modest this year, though some names have emerged recently as higher risks, Fitch said. Among them are NPC International, a Pizza Hut and Wendy’s franchisee, which missed a payment and likely will file or exchange debt. Two other restaurant chains at risk of default are Checkers Drive-In Restaurants and Steak N Shake Operations.
Caual dining chains, like Ruby Tuesdays, Fuddruckers, and Applebees are feeling a ripple effect. “Less frequent visits due to shifts in dining to delivery service or to increasingly popular healthier quick-service options will put more pressure on traffic at some brands at the same time the restaurants face increased competition from ready to cook meals available in supermarkets or via home delivery,” said Lyle Margolis, a director at Fitch. Obviously, more consumers staying home to eat in fear of being exposed to COVID-19 could also reduce customer visits.