When a bull market dies and rapidly is replaced by a bear market and instant recession, corporations have extreme difficulty in forecasting any business conditions or sales very far into the future. 24/7 Wall St. already tracks many sell-side analyst ratings, but the downgrades and negative actions from major credit ratings agencies can create far worse implications for a company.

Credit ratings can show the underlying credit metrics and financial health of a company far more than daily equity ratings changes from the likes of BofA Securities, Citigroup, Goldman Sachs and so on. More credit ratings changes are to the downside now, due to the overwhelming negative effects of the broader COVID-19 economy.

The three main agencies are Moody’s, Standard & Poor’s and Fitch Ratings. When they downgrade corporate credit ratings, the ultimate outcome can be higher borrowing costs for the companies. It’s not generally all that bad if an AA rating is moved to A as it is still very much an “investment grade” issue. Yet, when companies become at risk of becoming speculative rated or “junk bonds” with less than BBB−/Baa rating, their corporate borrowing costs can skyrocket, based on the interest rates they have to pay and also on the terms and debt covenants. Many investors cannot or will not purchase bonds if they are not considered “investment grade.”

The major agencies issued multiple credit ratings downgrades and negative credit ratings views on Wednesday afternoon through Thursday. The only good news on the back of these downgrades is that most of their common stocks were rallying because the stimulus is becoming more clear and because the stock market has now recaptured half of its losses from the peak to trough selling from February through March.

Here are 10 fresh credit rating actions that investors will want to consider when analyzing the finances of companies.

AutoNation Inc. (NYSE: AN) was maintained with a BBB− rating at S&P, but its outlook was revised to Negative based on expected pressures from the current coronavirus pandemic. That puts AutoNation at risk of losing its investment grade rating. S&P sees significant declines in sales and margins creating a risk that “cash flow adequacy” will breach its investment-grade metrics, which could lead to a BB+ credit rating.

Booking Holdings Inc. (NASDAQ: BKNG) was affirmed with an A− rating at S&P. That is still handily in investment grade, but the outlook was revised to Negative from Stable, based on the COVID-19 economic impact on the travel industry.

Cincinnati Bell Inc. (NYSE: CBB) was already within the “junk” status at S&P, but the agency lowered its rating to B− from B due to high leverage amid ongoing economic uncertainty. S&P’s new outlook is Stable, but it also lowered the senior secure debt rating to B+ from BB− and lowered its senior unsecured debt to CCC+ from B− in the call.

Cinemark Holdings Inc. (NYSE: CNK) has been under pressure as theaters are closed and no movies are coming out, but S&P downgraded its rating deeper into junk status, to BB− from BB. Unfortunately, the credit ratings remain on CreditWatch Negative, which means additional weakness in credit metrics may be expected.

Corning Inc. (NYSE: GLW) saw its rating Moody’s affirmed at Baa1 on its senior unsecured rating. That keeps it at investment grade, but Moody’s lowered its outlook to Negative. The agency indicated that Corning has allowed its leverage to rise well above historical and expected levels for the investment-grade rating, and while it is limiting share repurchases for now, the company is facing a weaker demand environment in its key market segments at the same time it faces uncertainties and disruptions.

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.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.