The effect of COVID-19 on industries has varied considerably and will continue to be felt for years to come in terms of growth prospects, financial policies and credit metrics. This is all the more true as the evolution of working and leisure methods continues to accelerate. This blog examines S&P Global Ratings’ outlook on credit and rating trends for the corporate sector, then focuses specifically on telecommunications, cable and technology.
Credit and rating trends for businesses
According to S&P Global Ratings, many positive developments have been seen in recent times with vaccine rollouts, GDP growth, proposed infrastructure spending and more. Despite this, however, the start of 2021 still featured high levels of ‘CCC’ credits, albeit significantly below the COVID peak.
In June 2021, secondary market spreads remained tight despite inflation fears,1 and combined speculative-grade issuance reached a record high of US $ 648 billion from the same month each year since 2018.2
Positive rating stocks have outpaced negative US non-financial stocks since February 2020, with even more significant improvements in 2021.3 Some sectors that have been heavily affected by the pandemic are improving and overall rating actions (both positive and negative) have largely focused on the speculative rating. The energy and capital goods sectors had the largest number of issuers with rating stocks between February 3, 2020 and July 2, 2021. The outlook bias remained negative across all sectors in May, but less than in May 2020.4
S&P Global Ratings expects North America’s telecommunications and technology sectors (hardware and semiconductor) to see credit metrics return to 2019 levels by the first half of 2021. Others Sectors hardest hit by the pandemic – including commercial aerospace, airlines and cruise lines – are unlikely to see these recovery rates until 2023 or beyond.4
The ‘new normal’ could mean structurally lower credit ratings for many sectors, an ever higher level of defaults (albeit below past highs) and the need to constantly monitor potential bubbles in certain asset classes. assets due to low interest rates and hyper-liquidity.
Credit Outlook for US Telecom and Cable
Rating downgrades topped more than two-to-one upgrades for US telecommunications and cable providers in 2020. However, most negative stocks were on the very low end of the rating scale where the leverage was already high. Among the high-profile issues that filed for Chapter 11 bankruptcy were Intelsat Corp., a satellite service provider, and Frontier Communications, a telecommunications company. So far in 2021, rating trends have been more balanced with 85% being “B” or higher.5
The telecommunications industry has proven to be quite recession-resistant during the pandemic. As shown in Chart 1, wireless service revenue growth is estimated to be 3-4% in 2021, although there is margin squeeze as carriers seek to differentiate their 5G capabilities with aggressive promotions.
Chart 1: Revenue growth for wireless services in the United States
On the other hand, wireline service providers are losing their share of the broadband market to cable, which contributes to declining revenues. Telecommunications companies are also aggressively developing fiber-to-the-home (FTTH) to better compete with cable. Overall, weaker credit measures are expected for 2021, with limited improvement in indebtedness over the next few years.
U.S. cable companies have profited from the pandemic, which has accelerated the inevitable secular trends towards high-speed data and the move away from linear television services. As shown in Figure 2, growth increased by around 11% in 2020 and is estimated at 6% for 2021.
Chart 2: EBITDA growth of the cable industry in the United States
The cable industry is favorably viewed due to its dominant market share for data connections and the move away from less profitable video services. Most of the risks to the cable are manageable. Overall, some improvement in credit metrics is expected based on strong earnings growth and Free Cash Flow (FCF) generation. That said, mergers and acquisitions and shareholder returns could limit improvement in leverage over the next two years.
US Tech Credit Outlook
S&P Global Ratings estimates that global GDP will grow 5.9% this year, while global IT spending will grow 9.4%. Semiconductors posted the highest estimated revenue growth at 16% for the year, followed by software at 12%. On the shipping front, PCs show the highest estimated growth at 15%.5
Looking ahead, the top five themes for the tech industry are:
- The global economic recovery is strengthening and IT spending is exceeding expectations. Progress in the deployment of the COVID-19 vaccine varies by region, but the areas most affected (IT equipment and services) are expected to rebound with the return to offices.
- Geopolitical concerns with China continue to be controversial under the Biden administration. The main IP theft issues with China remain unresolved, with the focus on strategic areas (5G and semi). More predictable foreign policies are useful for business planning and capital investment.
- The secular growth of the semiconductor industry is constrained by supply shortages in 2021. The reduction in inventory fills the gap with the additional capacity available in the third quarter of this year. The growth of the industry through 2021 is supported by strong demand and restocking.
- Heavy cloud spending continues with COVID-19 accelerating cloud migration. Large-scale players continue to generate record revenues and expand their footprint. Cloud adoption comes at the expense of on-premises infrastructure hardware and software sales.
- There is an enabling environment for capital markets and for credit-friendly mergers and acquisitions. A global economic recovery increases appetite for high yield bonds and leveraged loans. There’s also an increased appetite for equity-funded mergers and acquisitions by tech companies (fully or partially).
A positive rating action bias began in July 2020. In June 2021, only 5% of issuers had a negative rating outlook compared to 21% in May 2020, with technology issues on the rise as of July 12, 2021.5
Click here to learn more about S&P Global Ratings mid-year outlook for telecommunications and cable and technology.
- S&P Global Ratings Research. Data as of July 12, 2021. For information only.
- Refinitive; LCD, an offer from S&P Global Market Intelligence; Data as of July 2021. For information only.
- S&P Global Ratings. Data as of July 18, 2021. For information only. Downgrades, Upgrades and Net show the sum of rating changes over 4 weeks. Cumulative net changes are the absolute sum of net rating changes since February 2, 2020. This data was selected because on January 30, 2020, the WHO declared the COVID-19 outbreak a global health emergency.
- S&P Global Ratings rating actions are tracked from February 3, 2020 to July 2, 2021. Positive actions are upgrades, positive CreditWatch placements, and positive outlook revisions. Negative rating stocks are downgrades, negative CreditWatch placements and negative outlook revisions. IFNB — Non-bank financial institutions. For information only
- S&P Global Ratings. Data as of July 2021. For information only.