Nearly half of 'BBB-' rated issuers in the APAC region having low rating headroom, are at the risk of becoming fallen angels, stated Fitch Ratings. A fallen angel means bonds that were originally investment-grade but have been downgraded to junk.
Nevertheless, 17 issuers among Fitch’s portfolio of 36 in APAC are rated at the 'BBB-' level, the lowest investment-grade rating. So, these will have low rating headroom. The rating agency stated that around USD 117 billion in debt is issued by the 17 issuers, out of a total of USD 311 billion in debt issued by corporates rated 'BBB-'. It stated, “Many companies and countries will continue to face difficult conditions in the near term as the coronavirus pandemic evolves.”
In the case of India, the country’s sovereign rating will play a particularly prominent role in determining whether fallen angel risk crystallises for a number of APAC corporates. The agency revealed that ten of the 14 'BBB-' issuers on negative outlook are India-based. “These include seven government-related issuers (all in the Energy and Utilities sector) whose ratings are constrained by those of India, and mirror the Negative Outlook on the ratings of the sovereign, which we revised from Stable on 18 June.”
The agency revealed that the pandemic has already led to negative rating actions on almost a quarter of the publicly-rated corporates in APAC which are associated with Fitch. However, so far only one entity, Chinese mall-owner, Red Star Macalline Group, has fallen from investment-grade to sub-investment-grade.
The Foreign Currency Issuer Default Ratings (FC IDRs) of non-state-linked entities are not directly constrained by India's rating. However, the FC IDRs of most non-state issuers would be constrained if India's Country Ceiling were lowered to 'BB+' from its current level of 'BBB-'. As such, the outlooks on the FC IDRs of entities such as Bharti Airtel and Adani Transmission have been revised to negative. Some non-state Indian corporates, such as Reliance Industries (BBB-/Stable) and UPL Corporation (BBB-/Negative), are able to exceed the Country Ceiling.