Liquidity remains a key factor for UK high-yield corporates with ratings on Negative Outlooks, particularly for those in the sectors most affected by pandemic-related restrictions, Fitch Ratings says.
Stabilisation of the few investment-grade companies that remain on Negative Outlook due to the pandemic will depend on their ability to return to pre-pandemic leverage metrics or at least demonstrate a clear path to doing so in 2021 and 2022.
UK corporate issuers’ Outlooks are gradually stabilising thanks to significantly improved performance in early 2021, which is likely to lead to strong 1H21 results. The number of sectors most exposed to residual pandemic-related risks has reduced to just transport, leisure and civil aerospace.
Outside these sectors, we expect that pandemic-related Negative Outlooks are much more likely to be stabilised than to result in further downgrades if the economy recovers in line with our forecasts.
About a fifth of Fitch’s rated UK corporate portfolio remains on Negative Outlook; a proportion that is similar in both high-yield and investment-grade categories. However, sub-investment-grade issuers with Negative Outlooks represent nearly half of total sub-investment-grade debt, while investment-grade issuers with Negative Outlooks only represent 5% of total investment-grade debt.
The utility sector is a significant contributor to both categories, as some large issuers remain under pressure due to regulatory changes and other factors that are not directly related to the pandemic.
For UK investment-grade companies that still experience credit pressures, we focus our analysis on an issuer’s ability to restore its leverage metrics in line with rating guidelines in 2021 and 2022.
As the operating environment is improving in most sectors, we do not anticipate additional downgrades or downward revisions to Outlooks other than in exceptional circumstances. A return to pre-pandemic ratings is possible for downgraded credits that show a “V-shaped” recovery and are in sectors with clear recovery prospects.
Liquidity, particularly in the sectors most affected by pandemic-related restrictions and social-distancing measures, remains key for high-yield credits in 2021. Availability under revolving credit facilities will therefore be critical to give issuers the necessary cash buffer to weather any revenue or working-capital shocks in the next 12 to 18 months. Weaker liquidity and less-certain access to funding among sub-investment-grade credits was a common cause of negative rating actions during the depth of the crisis.
Brexit has exacerbated economic pressures in the UK. The UK-EU Trade and Cooperation Agreement signed on 24 December 2020, just days before the expiry of the Brexit transition period, established a free-trade area in goods but introduced significant non-tariff barriers. We expect the loss of single-market access to reduce GDP growth in the medium term and to drag on the performance of UK exporters to the EU, particularly in services.
However, the deal improves the outlook relative to a reversion to World Trade Organisation terms, which had become increasingly likely. This contributed to an increase in our 2021 GDP growth forecast in March to 5% from 4.1%.
