Standard & Poor's Ratings Services forecasts that credit quality will remain largely stable for US corporations in 2015 as cheaper energy costs support modest revenue growth. However, pockets of declining credit quality will persist for defense contractors and the technology and pharmaceuticals sectors, said an article published today, titled "2015 US Corporate Credit Outlook: Generally Stable, But Risks Are Rising."
"We expect US corporate ratings to remain generally stable in 2015, but the risks to our outlook are increasing," said Standard & Poor's credit analyst David Tesher. "Historically high speculative-grade leverage, a significant amount of lower-rated debt, and high stock market valuations have elevated systemic risk in the US financial system and increased its exposure to external contagion."
Although the sharp decline in oil prices will negatively weigh on the energy sector, the report suggests that it will immediately benefit airlines, trucking, retailers, and auto manufacturers, while lowering energy costs for many other segments of the economy. It could also boost consumer spending in 2015 and 2016, but stronger income gains are likely needed for more robust long-term growth. Standard & Poor’s expects continued US economic improvement to counteract slower growth overseas. US corporate revenues are anticipated to grow in the mid-single digits in 2015, in line with aggregate nominal economic growth prospects.
Standard & Poor’s forecasts that corporate refinancings will remain manageable in 2015 because protracted low interest rates and credit-friendly borrowing conditions have allowed many companies to push out maturities. However, the speculative-grade debt market is getting closer to a wall of expected maturities from 2017 to 2019, and record levels of “B” rated loans suggest that default rates will increase from their recent historic lows. In addition, Standard & Poor’s expects continued share repurchases, debt-financed dividends, and other equity-friendly rewards, which pose risks to credit quality.
Industries that are likely to face headwinds in 2015 include oil and gas
service providers and producers, coal miners, iron ore, traditional
advertising and publishing, paper producers, and smaller defense contractors.
Retail and small-ticket consumer-related sectors that have faced revenue
growth challenges this year could benefit if gasoline costs remain at
prevailing attractive prices or continue to fall. However, weak disposable
income growth and high corporate leverage will likely prevent most corporate
issuers from improving their credit quality.
"We believe that if a liquidity shock accompanies the next economic downturn,
lenders should expect higher default rates for 'B' rated loans, particularly
covenant-lite loans, compared with the levels during the Great Recession," Tesher said.