The “recession is already here,” blared a Standard & Poor’s press release on Tuesday morning.

“The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilization has begun,” said S&P Global’s chief economist Paul Gruenwald. “Europe and the U.S. are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.”

Companies are drawing down credit lines, others are entering a cash crunch, having already been operationally stretched. All are planning how to slash costs to deal with the enormous pullback in demand hitting consumer and business-to-business markets.

While all eyes are on the equity markets, credit is the lifeblood of corporations. Which companies face some credit market headwinds? Here are some of the latest corporate credit ratings changes from the credit rating agencies.

MGM Resorts

Moody’s Investors Service placed the ratings of MGM Resorts International on review for downgrade, including its corporate family rating and the rating on the probability of default.

“The review for downgrade is prompted by steep declines in visitation and gaming revenue at MGM’s properties in Macau as a result of the spread of the coronavirus that has restricted travel in the region, as well as expected reduced travel, consumer and business activity in the United States,” said Adam McLaren, Moody’s gaming analyst.

Moody’s expects efforts to contain the spread of the coronavirus to reduce casino visitation in the U.S. for an unknown period, “particularly the Las Vegas strip because business travel, conferences, and independent leisure travel will decline.”

“Recent market volatility driven by the coronavirus has made it increasingly difficult for companies to issue debt and it is uncertain when that trend will reverse.”

Exxon Mobil

Standard & Poor’s lowered Exxon Mobile’s issuer credit rating and unsecured debt rating to “AA” from “AA.” “With lower oil and natural gas prices, low refining margins and weak chemicals demand anticipated over the next two years, we expect measures to remain weak without a significant change in the company’s financial plans,” S&P said. It also slapped a negative outlook on the ratings because it says there could be a further downgrade if “the company does not take adequate steps to improve cash flows and leverage over the next 12 to 24 months.”

Boeing

A company with more significant cash problems is aerospace giant Boeing. S&P lowered its issuer rating for the company to “BBB” from “A” and its unsecured debt rating to the same level. That’s a downgrade of two notches.

“Boeing’s cash flows for the next two years are going to be much weaker than we had expected, due to the 737 MAX grounding, resulting in worse credit ratios than we had forecast,” S&P said. “In addition, the significant reduction in global air travel due to the coronavirus will likely result in an increase in aircraft order deferrals, further pressuring cash flows.”

Del Monte Foods

It’s not a good market to be seeking refinancing in. S&P lowered the issuer credit rating on Del Monte to “CCC” from “CCC+” and revised the outlook to negative. While canned goods might be flying off the shelves in grocery stores, Del Monte has had to postpone a $575 million bond refinancing transaction.

Besides having to partly refinance a first-lien term loans and an asset-backed lending facility, the company has three debt instruments with maturities in August and October 2020 totaling $187 million.

“We believe the delays in refinancing [are] indicative of challenges to completing a refinancing with reasonable terms,” S&P said. “Recent market volatility driven by the coronavirus has made it increasingly difficult for companies to issue debt and it is uncertain when that trend will reverse.”

S&P said it could “envision default scenarios such as a balance sheet restructuring or a bankruptcy filing if the company is unable to refinance in the medium-term.”

Continental AG

With major automakers shutting down production or at least being asked to by the United Auto Workers, many downgrades in the sector are likely. Automotive parts supplier Continental was called out by Moody’s on Tuesday. Moody’s downgraded the company’s issuer rating to Baa2 from Baa1.

“The rating downgrade to Baa2 ratings reflects the further deterioration in the operating environment for European automotive parts suppliers, the resulting pressure on Continental’s profit margins and financial metrics, as well as the company’s elevated distributions to shareholders,” Moody’s said.

Avis Budget Group

S&P put rental car giant Avis Budget Group on credit watch negative. “The sharp decline in air travel due to the coronavirus pandemic will hurt demand for car rentals at airports, the largest part of Avis Budget’s business,” S&P said. “Further, the pandemic and government actions to combat it will hurt economic activity, an effect likely to linger after cases of the virus decline.”

S&P did note that carmakers have some flexibility to respond to demand shocks. “During the period following the Sept. 11, 2001, attacks, the U.S. car rental industry was able to downsize its fleet by around 20% in the following month by returning cars to the auto manufacturers under agreements that allowed such returns as long as certain conditions were met,” the agency said. “However, most of Avis Budget’s vehicles today are not covered under these agreements, which could cause oversupply and thus pressure on used car prices.”

Sovereigns

The credit ratings of nations will not go unscathed.

Fitch Ratings said on Tuesday that “the economic impact of the coronavirus combined with the associated policy responses [are] likely to result in a higher-than-average number of sovereign rating actions in 2020, and a more pronounced downward bias in sovereign rating changes than in any year since the aftermath of the global financial crisis in 2009.”

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One response to “Credit Quality: Downgrades Keep Coming”

  1. Going Beyond EBITDA
    In the old days (last week?) debt was cheap so borrowing “too much” was not an issue for most companies. Besides, interest expense was “beyond EBITDA” so no impact on operating earnings.

    For the foreseeable future liquidity and “access” will be the drivers for companies seeking to survive

    Liquidity – shorten your cash conversion cycle (CCC). A/R: lower prices for prompt payors. Re think stretching out vendors if you want deliveries to happen. working capital matters

    Access – a shorter CCC will inoculate your company from the risk of not enough credit. Remember loans are marginally profitable to your bank so look for other ways to secure your bank relationships and access the resources you will need.

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