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U.S. Corporate Pandemic Recovery Assumptions Mostly Steady Post 2Q20, Fitch

September 28, 2020, 09:05 AM
Filed Under: Industry News

Widespread upward revisions of US corporate sector-level post-lockdown recovery assumptions that would lead to mass rating actions post-2Q20 results are unlikely, given the cautious outlook on the pace of economic activity and sector fundamentals, says Fitch Ratings. Second-quarter results were indicative of the pandemic’s negative financial effect on issuers but surprised on the upside for some sectors, including Homebuilding, Building Materials, Auto & Related and pockets of Retailing. Results for most sectors, however, were relatively in line with Fitch’s expectations.

The pandemic’s effect on the US Homebuilding and Building Materials sectors has not been as negative as anticipated, but Fitch views the better than expected 2Q20 performance as not sustainable. Fitch forecasts housing activity and home improvement spending will weaken during 2H20 and into 2021, despite being stronger than expected during 2Q20 and the current quarter.

Second-quarter revenue and earnings in the Auto & Related sector were both better than anticipated, due primarily to demand for light vehicles and strong pricing from low inventory. However, Fitch assumes the auto industry will take nearly two years to recover from pandemic-driven demand reduction, given high unemployment rates.

Retail revenue and EBITDA in 2Q20 were better than Fitch expected. However, there has been a divergence in spending, and a significant amount of uncertainty remains in the near term regarding the duration of the pandemic, unemployment trends, new government stimulus and changes to consumer behavior. Auto parts, used vehicle and home improvement item sales were not as negatively affected, as consumers shifted from experiential spending toward these items.

Demand destruction will likely remain a risk for the duration of the health crisis, despite better than expected 2Q20 results in some sectors. Fitch’s baseline coronavirus scenario assumes voluntary social distancing and reduced confidence will continue to depress economic activity, with an initial activity bounce in 3Q20 followed by a slower recovery trajectory from 4Q20. Fitch’s downside scenario assumes targeted measures to contain coronavirus hotspots will fail, resulting in a renewal of lockdowns similar to those that caused a second round of GDP declines.

Broad-based upgrades are not likely in the near term, and downgrades are expected to be more selective. Fitch prioritized its portfolio for review in March, which resulted in a large wave of negative rating actions. Of the more than 800 Fitch-rated North American issuers, 158 were downgraded by one or more notches through Sept. 11, 2020. Sectors with the highest percentage of downgraded issuers were Transportation at 83%, Retailing at 67% and Auto & Related at 50%. Rating Outlooks and Watches on 62% of the North American corporate portfolio were Stable on Sept. 11, 32% were Negative, 4% were Positive and 2% did not have an Outlook or Watch due to ratings of ‘CCC’ or below.

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