NEW YORK –Kroll Bond Rating Agency (KBRA) releases a sector-by-sector analysis of the coronavirus disease’s (COVID-19) spread and potential impacts on credit.
The main takeaways from this report include:
- We expect the impact across individual asset classes to be quite varied, both in terms of magnitude and timing. Sensitivity comes from not only direct exposure, but also indirect, the latter arising largely from the degree of economic downturn that ultimately results. Near-term risks to global economic output are real and material, but two things may help alleviate impact to credit: (1) the outbreak is happening when the world is growing economically, and (2) the experience in China appears to be settling down as the reported growth of the virus is slowing.
- Failure to bring the spread of the virus under control endangers global economic growth, with recession in the back half of 2020, according to most economists, an increased possibility.
- We group the impact of the outbreak across the economy, and credit, in the following way:
- Phase 1: Direct exposure—Industries experiencing a sudden shock including aviation, shipping, leisure & hospitality, and energy; market and interest rate sensitive credits such as banks and insurance will also face near-term headwinds, as will manufacturers hit by broken supply chains.
- Phase 2: Cyclical sag—Threat of more prolonged economic dislocation grows, affecting industrials, basic materials, consumer durables (including electronics/technology), and retail; insurance (especially property and casualty), could face an overhang related to what is considered insurable commercial activity.
- Phase 3: Broad-based impact—Widespread fear, stemming from failure to stem the spread of the virus, undermines consumer and commercial confidence.
- Government and central bank intervention, now fully committed across the globe, and led by the surprising U.S. Federal Reserve rate cut, can help buoy the private sector in worst case scenarios, but will matter less to all-important U.S. consumer confidence.
- KBRA is monitoring its ratings across all sectors for direct and indirect impact from the outbreak; at this point risks are skewed to the downside with fat tail distributions of outcomes.
To access the report, click here.
Related Publications: (available at www.kbra.com)
- Coronavirus and Its Effect on the Commercial Aviation Industry
- Coronavirus (COVID-19) and P&C: Not a Straightforward Development
- COVID-19: Implications Spread to Life Insurers
- Coronavirus (COVID-19) Impact: CMBS Exposure to Hawaii Lodging and Retail
- Coronavirus (COVID-19) Impact: CMBS Exposure to Las Vegas Strip
- Coronavirus (COVID-19) Impacts and Fears: A Focus on U.S. Airport Credit.
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.