The Great Tragedy

Since the start of the year, the number of downgrades for European High Yields in the Moody’s universe has shot up on high 78 in Q1, 123 in Q2 before subsiding in July and August down to 20. Concurrently, the number of upgrades is rock bottom at 3, 4 and 2, respectively. There follows that the downgrade-to-upgrade ratio towers on high at 10x, having peaked at 13.8x in June. It also means that the distribution of ratings for the € HY universe has undergone a sweeping change: the proportion of issuers rated B3 or less has shot up by 27pp to almost 40%, due notably to the downgrades of B1 and B2 issuers. The slight increase in the proportion of Ba1 issuers (from 7% to 8%) and the stable proportion of Ba2 issuer (at 8%) is explained by the population of fallen angels. Moody’s expects this deterioration of credit to intensify through to Q1-21 before an improvement sets in. As regards the projections of the other credit rating agencies, S&P revised upwards the 2020 annual default rate for the United States to 12.5% in September (from 10% back in March), citing delays passing the new relief bill and the weaker economic recovery. As for Europe, the default rate has come in for a slighter upward revision to 8.5% in 30 June 2021, up from 8.0% back in March. As for Fitch, the 2020 and 2021 default rate s for the United States have been revised downwards to 5.5% (from 7.0% and 8.0%, respectively, back in March) on account of the government support measures and loan moratoriums. In Europe, the default rate is expected to reach 4.5% at the year-end. The credit rating agency does, however, expect the default rate to rise in 2021, due notably a s lower-than-expected economic recovery and to the second COVID-19 wave. For more details, consult our HY Monthly published on Friday .