Link to Fitch Ratings' Report(s): Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases
Fitch Ratings-London/New York-02 April 2020: Fitch Ratings has published a common set of baseline and downside-scenario parameters against which all ratings groups globally are evaluating the impact of the coronavirus pandemic. As part of our portfolio review, rating actions will be taken in line with expected trajectories under the baseline scenario.
Core assumptions for our baseline case include a two- to three-month lockdown in key economies with a five- to six-week period of peak movement restrictions. This results in a rapid and significant deterioration in the labor market and a sharp reduction in personal income with commensurate falloffs in demand for discretionary goods and services. We expect cumulative corporate high-yield and leveraged-loan default rates to be 12%-15% in Europe and the US in 2021-2022, with sustained spread widening and volatile capital-market conditions resulting in market-access challenges. We expect oil to be range-bound within $25-30/bbl for much of 2020.
Beyond the short term, our baseline case expects large-scale fiscal stimulus and balance-sheet support. This will limit the depth of the initial downturn to some extent and will set the stage for recovery once the health crisis subsides. That said, we still expect income levels to be sharply down from 4Q19 levels through 2H20 and into 2021. The overhang and eventual unwinding of liability transfers on such an unprecedented scale will have a long-lasting effect on credit conditions.
Fitch's downside scenario differs from its baseline case with a hypothetical re-emergence of infection in major economies, prolonging the health crisis and confidence shock. Recurrent lockdowns would prevent a recovery in financial markets and exacerbate the negative wealth shock and depressed demand relative to our base case. This would push the timeframe for any meaningful recovery beyond 2021.
Key assumptions in our negative scenario include sharper economic contractions in the US and Europe, double-dip slowdowns in China and East Asia, and a halting recovery from 2Q21. Cumulative corporate high-yield and leveraged-loan default rates would be 17%-25% in the US and Europe by 2021. Prolonged macroeconomic disruption would mean that credit markets would be reliably open only to the strongest borrowers outside of official sector programs.
For details on Fitch's coronavirus baseline and downside scenario, please refer to the special report available in the above link.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
