10 Credit Ratings Actions That Could Increase Corporate Borrowing Costs in the COVID-19 Recession

Hilton Worldwide Holdings Inc. (NYSE: HLT) was downgraded to BB from BB+ by S&P, and the agency kept its rating on Negative CreditWatch as the COVID-19 travel industry and recession will keep pressure for some time. While that is a junk bond status, S&P kept Hilton’s senior secure debt at BBB− due to a high recovery rate if senior lenders have to take assets.

Lear Corp. (NYSE: LEA) was maintained at BBB− by S&P on all issues, but the junk status is now a risk after S&P revised its outlook to Negative from Stable. That outlook noted “at least a one-third chance” that it could lower ratings if EBITDA margins call below 8% during the next 12 months to 24 months.

Penske Automotive Group Inc. (NYSE: PAG) saw S&P lower its outlook on Wednesday afternoon to Negative, based on expected pressures to continue from the COVID-19 pandemic. Its BB credit rating was already at junk status.

W&T Offshore Inc. (NYSE: WTI) has suffered along with weak energy prices and demand, and S&P downgraded it deeper into junk status, to a CCC+ rating from a prior B−. S&P kept a Negative outlook, based on weak financial measures and due to market conditions.

Wells Fargo & Co. (NYSE: WFC) was in the news late on Wednesday after the Federal Reserve eased its asset cap so it could lend to small businesses affected by the coronavirus pandemic. Wells Fargo’s junior subordinated debt instruments were rated BBB− after a prior debt exchange. What matters here is that Wells Fargo’s long-term issuer rating and its senior unsecured ratings are both still A− at S&P. The new ratings were only on two junior subordinated instruments, one being a $750 million debenture due in 2086 and a $300 million debenture due in 2029. A press release from February 28 noted that Wells Fargo would liquidate Wells Fargo Capital X and First Union Capital II and that it would result in the cancellation of related capital securities and distributions of underlying debentures to holders.

We have seen Fitch update its views on credit tied to auto and consumer spending. According to Fitch Ratings:

The coronavirus pandemic is going to negatively affect auto credit performance in its latest U.S. Auto Asset Quality Review. Fitch revised its sector outlook to negative from stable for auto finance companies back on March 30. Key issues impacting the new outlook include “sharp increases in unemployment” and “declines in used vehicle prices” contributing to push auto credit losses meaningfully higher.

Fitch also has updated its outlook for U.S. retail discretionary spending to decline 40% to 50% in the first half of 2020. Fitch sees a “slow rate of improvement expected through the summer from a current 80% to 90% decline in sales if stores start to open mid-May or early June.” It noted that sales are projected to be “down mid-to-high single digits in second-half 2020 and sales in 2021 to decline 8% to 10% from 2019 levels.”

A slew of other credit ratings actions and warnings earlier in the week had an impact on BlackRock Capital Investment, Century Aluminum, EQM Midstream, New Residential, PNM Resources, Ralph Lauren, YRC Worldwide and others.

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