July 5, 2022

Travel and leisure top list of corporate credit ratings in flux during pandemic

The COVID-19 pandemic has not only been disrupting lives and businesses around the world for…

Travel and leisure top list of corporate credit ratings in flux during pandemic

The COVID-19 pandemic has not only been disrupting lives and businesses around the world for more than a year, but also the credit ratings of big corporations.

Corporate credit ratings serve as a key measure of creditworthiness, but also can determine borrowing costs. They range from AAA for top-notch companies like Johnson & Johnson
JNJ,
-1.06{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}
and Microsoft Corp.
MSFT,
+1.03{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}
to D for defaulted businesses.

Increasingly, credit ratings also can signal a potential path to recovery for industries hard-hit by the prolonged public-health crisis.

Take travel and leisure, a sector that saw half of all investment-grade companies globally drop to high-yield, or “junk,” status during the pandemic, according to a new report from Credit Benchmark.

Even as parts of Europe remain in a lockdown to contain the coronavirus, travel and leisure has experienced the highest share of “fallen angels” (at 11.1{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}) returning to investment-grade status during the crisis, (see chart below).

Fallen angels, rising stars


Credit Benchmark

The report identified 1,051 fallen angels out of 6,895 companies it sampled globally, or about 15{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5} of the total. It found that about 5{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5} migrated back to investment-grade.

Retailers, oil and gas, and the automobile and parts sectors also were volatile on the credit-ratings front in the past year, according to the report, with migrations between the two major brackets now a key focus for investors.

Read: The next rising stars of the debt world? Probably corporate fallen angels

Upgrades and downgrades can make a big difference for a company in terms of its borrowing costs. The average yield on bonds issued by U.S. investment-grade companies now sits in the 2.21{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5} range, whereas it’s nearly double for those in speculative-grade territory at about 4.21{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}.

Those rates matter, particularly in the past year as cruise companies, including Carnival Corp
CCL,
+2.59{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5},
 Royal Caribbean Group 
RCL,
+0.10{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}
and Norwegian Cruise Line Holdings Ltd 
NCLH,
-0.26{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5},
have borrowed billions as their ships largely have been idle.

See: White House pushes back on cruise industry’s efforts to restart in July, as Florida sues Biden administration

But along with other “recovery” trades, shares of Carnival were up 31.9{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5} year to date Thursday, while those of Royal Caribbean and Norwegian were up about 20{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}, according to FactSet data.

That compares with the Dow Jones Industrial Average’s
DJIA,
+0.89{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}
gain of 9.5{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5} for the same period, while the S&P 500 index
SPX,
+0.77{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}
has advanced 9.1{d54a1665abf9e9c0a672e4d38f9dfbddcef0b06673b320158dd31c640423e2e5}.