Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 - A Two-Tier Recovery Of Credit And Funding Conditions
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Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 A Two-Tier Recovery Of Credit And Funding Conditions Feb. 9, 2021
Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Asia Pacific Mid-Year Outlook Xavier Jean
Singapore
Further Credit Downside Likely Amid Growing Polarization xavier.jean@
spglobal.com
+65 6239 6346
Key Takeaways Rating Distribution
AAA
− Downside risk remains prevalent in Asia-Pacific's rated corporate sector, with AA+
about 25% of the investment-grade companies and about 33% of the speculative- AA
AA-
grade ones on negative outlook. A+
A
− Credit divergences are appearing within the region. The downside rating bias has A-
BBB+
reduced in China and India but stays high in Indonesia, Japan, and Pacific. BBB
BBB-
− Some funding green shoots are appearing, with a growing number of smaller BB+
BB
issuers, 'B' rated and below, able to refinance albeit at higher costs and sometimes BB-
much shorter tenors. B+
B
B-
− Our recovery base case still assumes a profit recovery and improving credit metrics CCC+ and below
in 2021 for most issuers. Nearly 40% of credit ratings could be at risk if profit
0% 5% 10% 15% 20% 25%
recovery is delayed to 2022, especially in China, Japan, and Pacific.
Outlook Distribution (Main Sectors)
Still significant downside rating risk regionally, with divergences deepening among
countries. Credit conditions at rated Asia-Pacific corporate issuers are far from stabilized Negative* Stable Positive§ Developing
heading into 2021. Nearly one-fourth of ratings on investment-grade issuers and almost Automobiles
one-third of speculative-grade issuers are still on negative outlook or CreditWatch with Media & leisure
negative implications as of Jan. 28, 2021. Compared with six months ago, downside rating Oil & gas
Transportation
risk is reducing in China (about 20% of issuer ratings on negative outlook) and in India Telecommunications
(about 25%) as both economies have recovered somewhat faster than elsewhere in the Chemicals
Retailing & restaurants
region and funding conditions mildly improved even for smaller issuers. Corporate
Capital Goods
Indonesia is at the other end of the spectrum (55%). Recovery prospects in 2021 there are High technology
more elusive amid rising COVID-19 cases, a slow vaccine roll-out, subdued consumer Consumer Products
Real estate
sentiment, and selective funding by banks. More defaults or restructurings in 2021 are Mining and metals
likely after numerous such events in 2020 at private and state-owned entities. Downside Infrastructure†
rating pressure remains close to multi-year highs in Japan and Pacific. 0% 50% 100%
Funding--the rich can still borrow, some funding green shoots for weaker borrowers.
Access to funding is likely to stay a major credit differentiator in Asia-Pacific this year. Hypothetical Outlook Distribution
Capital market and bank funding has been ample (and sometimes at all-time lows) for the Under Different Profit Recovery Scenarios
larger, investment-grade or more diversified issuers across the region. Some funding green
Positive Positive at risk Negative
shoots are also appearing for (1) smaller, more leveraged issuers, notably Chinese real Negative at risk Stable at risk Stable
estate developers (despite generally expensive and short tenors); and (2) for the past few Developing
weeks, weaker companies in Indonesia, which had remained mostly closed for such
100%
issuers most of 2020. Funding from domestic banks is likely to stay selective and
potentially even tighter as debt moratoria have ended or are set to end in Malaysia, China,
75%
Thailand, Indonesia, or India through 2022.
Nearly 40% of all outstanding corporate ratings in Asia-Pacific could face further 50%
downside risk if profit recovery is delayed to 2022. Our economists anticipate a
widespread regional macroeconomic recovery in 2021. Under that base-case scenario, we 25%
forecast: (1) a median profit growth of mid to high single digits in 2021 over 2020; (2) higher
profits at nearly 90% of rated entities in Asia in 2021 than in 2020; and (3) average credit 0%
In 2021 In 2022
ratios reverting to pre-COVID-19 levels in the second half of 2022 for the majority of
sectors. We estimate that nearly 40% of rated issuers in Asia-Pacific could face rating
downgrades over the next 12-18 months assuming 2021 profits stagnate at 2020 levels. Ratings data as of Jan. 28, 2021. *Negative
Reduced profits are likely to increase leverage, delay improvement in credit metrics to the includes placements on CreditWatch negative.
second half of 2023 or reduce rating headroom for nearly 20% of ratings currently on §Positive includes placements on CreditWatch
stable outlook, mostly investment grade issuers in China, Japan, and Australia operating in
positive. † Includes power, gas, and water
the commodities, real estate, automobile and machinery, and transportation sectors.
utilities and transport infrastructure. YTD--
year to date. IG--investment grade. SG--
speculative grade. YOY--year on year.
spglobal.com/ratingsdirect Feb. 9, 2021 2Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 Corporate Top Trends Update Timeframe Of Recovery Of (Run Rate) Credit Metrics To 2019 Levels APAC Green indicates sectors that we expect will recover sooner than initially indicated in our June 2020 publication. Source: S&P Global Ratings. Corporates In Some Countries Won't Regain Pre-Pandemic Credit Metrics Until Late 2022 Our recovery outlooks on rated corporate and infrastructure issuers, by country Note: Years shown are calendar years. 1H--First half. 2H--Second half. Source: S&P Global Ratings. spglobal.com/ratingsdirect Feb. 9, 2021 3
Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Australia & New Zealand Richard Timbs
Sydney
COVID Recovery To Produce Winners And Losers In 2021 richard.timbs
@spglobal.com
+61 2 9255 9824
Key Takeaways Rating Distribution
AAA
− We expect the widespread distribution of a COVID-19 vaccine in Australia and AA+
New Zealand during 2021 to drive varying recovery of profitability and credit AA
AA-
metrics. A+
A
− We anticipate median EBITDA growth of 0-10% in 2021 from depressed 2020 A-
BBB+
levels, translating into stronger credit metrics for about 50% of rated entities. BBB
BBB-
− Sectors exposed to international travel should remain under pressure, with BB+
BB
international borders likely to be closed to many countries for much of the year. BB-
B+
− Rating outlook distributions remain skewed to the downside, particularly in the B
B-
gaming, transportation, and oil and gas sectors. CCC+ and below
0% 5% 10% 15% 20% 25%
Improving economic conditions to support business performance generally in 2021.
Rating Statistics (2020)
Signs of strengthening economic growth and faster-than-expected employment recovery
IG SG Total
are likely to boost sections of the corporate sector. The Australian Federal government
Ratings 98 20 118
reported in late 2020 that more than 80% of job losses from COVID-19 have been
Downgrades 5 4 9
recovered, and that unemployment is now expected to peak at 7.5% in the March 2021
quarter versus its previous expectation of an 8.0% peak in the December 2020 quarter. The Outlook changes to negative* 19 1 20
improved employment position has alleviated some pressure on the Federal government to Upgrades 1 1 2
make wage subsidy payments under the JobKeeper program since some businesses have Outlook changes to positive§ 2 0 2
performed better than originally anticipated.
Outlook Distribution (Main Sectors)
Sector performance will be mixed as some sectors struggle from ongoing border
controls and structural change. Overall, our views on the rate of recovery of profitability Negative* Stable Positive§
and credit metrics for 2021 and 2022 post COVID-19 have improved somewhat in recent
months. Essential retail, agriculture, telecoms, and utilities should perform at or above Gaming
2019 levels in earnings terms during calendar 2021. For transport/transportation
infrastructure, gaming, and oil and gas the recovery still looks to be in 2022/2023 or Transportation
beyond. Structural change resulting from (or exacerbated by) COVID-19 remains an issue. Oil & Gas
For retail REITs, the continued growth of online shopping poses ongoing challenges for the
sector, and office REITs could face a material hit to demand as more employees choose to REITs
work from home and national vacancy rates sit above 10%. For commodities, the outlook Metals & Mining
remains mixed, given strong iron ore and gold prices persist, oil fluctuates and coal
remains under sustained pressure, partly driven by ESG factors. Separately, trade and Retail – non essential
political tensions with China have created difficulties that are likely to continue in 2021, Retail – essential
particularly for wine and coal exporters.
0% 50% 100%
Downside ratings pressure continues, but has eased somewhat in recent months. Our
ratings bias continues to have a significantly negative skew, with approximately 27% of our Median Item Growth
rated universe on negative outlooks. The speculative-grade category has a sharper Pacific Rated Universe
downside risk for ratings, with 40% of the portfolio on negative outlooks. Negative outlooks 2020 2021E 2022E
remain prevalent in the gaming (75% negative), transportation and transportation GDP Change (%) YOY
-3.4 4 3.2
Australia
infrastructure (53% negative), and oil and gas sectors (33% negative) sectors. Bucking the GDP Change (%) YOY
-4.9 4.3 2.9
trend, the outlook on Goodman Australia Industrial Partnership was revised to positive New Zealand
from stable late in 2020, reflecting the strong performance of the industrial property sector Revenue change (%) YOY -5 to flat Flat to 5 Flat to 5
through the COVID-19 pandemic. EBITDA change (%) YOY -5 to 5 Flat to 10 Flat to 10
Capex change (%) YOY 5 to 10 -5 to flat Flat to 5
Ratings data as of Jan. 28, 2021. *Negative
includes placements on CreditWatch negative.
§Positive Includes placements on CreditWatch
positive. YTD--year to date. IG--investment
grade. SG--speculative grade. YOY--year on
year.
spglobal.com/ratingsdirect Feb. 9, 2021 4Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
China Chang Li
Beijing
Charles Chang
Hong Kong
Defaults, Diverging Credit Conditions To Challenge Recovery chang.li@ charles.chang@
spglobal.com spglobal.com
+86 10 6569 2705 +852 2533 3543
Key Takeaways Rating Distribution
AAA
− We raise our profit growth forecast for China’s corporate sector in 2021, but also AA+
AA
expect debt to grow at a faster pace. Credit metrics of most Chinese corporates AA-
should return to their 2019 levels by the end of 2021. A+
A
− That said, downside risks remain for Chinese corporates. Nearly 22% of our A-
BBB+
ratings have negative outlooks or are on CreditWatch with negative implications. BBB
BBB-
− We expect Chinese corporates to face further credit divergence. Uneven BB+
BB
recovery and polarizing funding conditions continue to weigh on many issuers’ BB-
credit profile. B+
B
B-
CCC+ and below
Growth expectation revised higher, along with debt burden. China’s GDP grew by 2.3% in 0% 5% 10% 15% 20% 25%
2020, slightly ahead of our forecast of 2.1%. We project median EBITDA growth for Chinese
corporates to be as high as 12% in 2021, at the higher end of our previous 5%-10% forecast. Outlook Distribution
However, our 2021 debt growth forecast of 6% is also above our initial expectation of 5%. We Negative* Stable Positive§
maintain our view that Chinese corporates’ credit metrics will return to their 2019 levels by the
end of 2021. All 22% 70% 7%
SG 29% 61% 10%
Negative outlook bias indicates ongoing downside risk. A net negative credit bias remains
IG 18% 77% 5%
for China corporates in 2021, as has been the trend for three years. Nearly 22% of ratings are
on negative outlook or CreditWatch negative. 0% 20% 40% 60% 80% 100%
Growing pressure on economic condition. Vaccine roll-out has brought hope, but the recent Outlook Distribution (Main Sectors)
resurgence of COVID-19 cases indicates lingering uncertainties on resolving the pandemic.
Any further containment measures could slow the momentum of the recovery. Meanwhile, Negative* Stable Positive§
COVID-19 is challenging China’s rebalancing toward consumption--a work in progress for
years to come. The U.S.-China strategic confrontation may ease, but the new Biden Automobile
administration is initially focusing on U.S. domestic issues, namely COVID-19 and the Media and leisure
economy. Chinese corporates are still facing hurdles on supply chains, market access, and Capital goods
funding channels, particularly for the tech sector, and this looks unlikely to change any time
soon. These sanctions saw bipartisan support. Strains in the relationship between the world’s Real estate
two largest economies will likely persist as they see each other as a competitive threat. Consumer products
Transportation
Funding condition remains a challenge for weak issuers. Although financing conditions are
Infrastructureǂ
still healthy in the offshore dollar bond market, the onshore bond market is unlikely to remain
as favorable as last year. The Chinese central bank’s potential financing target for 2021 is Commodities†
likely to slow funding growth of the overall economy. With record high debt leverage in the
0% 50% 100%
country, the regulators aim to maintain a balance between real economic growth and
potential systemic risk--a task made more challenging by the looming maturity wall faced by Median Item Growth
Chinese issuers. More than Chinese renminbi (RMB) 8 trillion in onshore bonds and nearly
China Rated Universe
US$100 billion in offshore bonds are coming due this year. This large refinancing need may
2020 2021E 2022E
lead to higher funding costs or weakening funding access, particularly for lower-rated
GDP Change (%) YOY 2.3 7 5
corporates, such as those rated in the ‘B’ category and below, which account for nearly a
Revenue change (%) YOY Flat to 5 About 10 5 to 10
quarter of all Chinese offshore corporate issuers.
EBITDA change (%) YOY Flat 10 to 15 5 to 10
Capex change (%) YOY Flat to 5 Flat to 5 Flat to 5
Credit differentiation to drive more divergence in funding costs. Risk repricing in the
domestic bond market has been underway as defaults continued to rise in recent years. Outlook data as of Jan. 28, 2021. *Negative includes
Investors are differentiating credit risks, which has driven funding costs to diverge for Chinese placements on CreditWatch negative. §Positive
corporates. For example, in one of the largest domestic bond segments (one year), less includes placements on CreditWatch positive. .
favored SOEs have issued RMB120 billion (US$18 billion) in bonds with coupons that are 100
†Includes oil and gas, chemicals and metals and
basis points higher than the average – a record high amount since 2015. Additionally, the
mining. ǂIncludes power and gas utilities, and
uneven recovery has also weighed on corporate credit profiles. If the pandemic become
prolonged, the sectors most at risk include transportation, retailing, and consumer products, transport infrastructure. IG -- Investment grade. SG --
in our view. Speculative grade. YOY--year on year.
spglobal.com/ratingsdirect Feb. 9, 2021 5Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
More SOE defaults ahead. We believe more defaults of state-owned enterprises (SOEs) are
likely as the Chinese authorities refocus on managing the financial risk of SOEs after the
pandemic. Unsustainable debt burdens of some SOEs may incentivize more in-court debt
restructurings, which could allow local governments to continue operations and maintain
employment but lead to significant losses for investors. Local government’s ability to provide
support has been weakening under increasingly stringent central government regulations and
the economic slowdown since 2018. For some of their SOEs, the onslaught of COVID-19 was
the last straw, and more may not be able to recover even as the pandemic passes.
Domestic Bond Maturities
LGFV Sector Outlook: Bil. RMB Mature Put Call
3,000
Refinancing Pressure On The Horizon 2,500
2,000
Refinancing risk back in the spotlight, yet under a tighter policy and 1,500
funding environment. The local government financing vehicles (LGFV) 1,000
sector faces a huge RMB2.7 trillion maturity wall in the onshore bond
market in 2021, while funding condition slightly worsens. Tighter policy and 500
a refocus on de-risking in system are coming back as China’s economy -
normalizes. Compounded with a restriction on structured issuance and 2021 2022 2023 2024 2025 2026 2027 After
limited access to wealth management products as a funding source, LGFVs 2027
will be under increasing pressure in 2021. Source: Wind, S&P Global Ratings.
Weaker LGFVs with large near-term bond maturity would have limited
alternatives and be vulnerable to strained liquidity. Refinancing risk in the Yield Spread Continue To Widen For Lower Rating LGFVs
offshore dollar bond market is manageable. Outstanding dollar bonds by AAA AA+ AA
LGFVs are much smaller than onshore bonds, and issuers are generally YTM (%)
supported by regulators and local governments in refinancing dollar bonds. 4.5
Credit polarization will exacerbate after recent high-profile SOE 4.0
defaults. Lenders are likely to stay risk-averse to LGFVs controlled by low-
3.5
tiered governments or those from regions with a history of SOE defaults. In
a fairly benign funding environment in 2020, many weaker LGFVs also 3.0
tapped the market by issuing high-yield and short-term papers. However,
2.5
we believe creditors will be more refrained from lending to LGFVs owned by
May. 20
Aug. 20
Nov. 20
Dec. 20
Jan. 20
Apr. 20
Jan. 21
Mar. 20
Jul. 20
Sep. 20
Oct. 20
Feb. 20
Jun. 20
weaker governments in 2021. Lenders differentiate and favor LGFVs from
regions with stronger fiscal power relative to debt burden and those
executing government mandates as key platforms.
Note: Ratings above are by domestic rating agencies. Source: Wind, China
Default risk is growing on LGFVs owned by weaker governments and Securities Index, S&P Global Ratings.
operating commercially. Government willingness to support LGFVs
remains strong relative to SOEs operating in competitive markets.
LGFV Domestic Bond Net Financing Hit
However, local governments with constrained financial resources will be
more selective in supporting bloating SOE debt and may deliberate on the New Highs In 2020
costs and benefits of continued bailout. While market and regulatory AAA AA+ AA AA- & Below Total
tolerance to sporadic defaults seems increasing, especially on those small
and weak LGFVs, we believe system-wide and high-profile defaults by Bil. RMB
LGFVs are less likely as the control of systemic risk remains a priority in 400
China. 300
200
A quarter of our ratings on LGFVs remain on negative outlook. This mainly
reflects our view of the deteriorating fiscal positions and weakening credit 100
profiles for their local government owners, mostly lower-tier ones. 0
Weakening local government credit profiles could weigh on their ability to (100)
provide timely financial support to their LGFVs.
Mar-13
Oct-13
Jul-15
Sep-16
Apr-17
Mar-20
Oct-20
Aug-12
Feb-16
Jun-18
May-14
Aug-19
Jan-12
Dec-14
Nov-17
Jan-19
Laura Li
Hong Kong
laura.li@spglobal.com Note: Net bond financing = New bond issuance – bonds to be repaid over the
+852 2533 3583 same period. Ratings above are by domestic rating agencies. Source: Wind,
S&P Global Ratings.
spglobal.com/ratingsdirect Feb. 9, 2021 6Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Real Estate Sector Outlook:
Expect national property sales to slow down in 2021. We believe the solid property demand in larger cities is waning after the strong
run post pandemic. Demand in lower-tier cities will likely remain volatile on average. Therefore, we expect China's property sales value
to be largely flat in 2021, versus a 10.8% growth in 2020. In addition, steeper price promotions are likely to drive volume. In our view,
any volume growth for the year will likely be offset by lower prices.
Sales growth for the Chinese developers we rate will likely be slower as well. Some of them will need to spend less and aim for lower
scale growth to fulfill leverage and liquidity requirements set by the regulators in the "three-red-line" policy, which caps their debt
ratios. We expect sector leverage to be relatively stable; we forecast average debt-to-EBITDA ratio at 6.3x-6.5x in 2020 and 2021,
versus 6.5x in 2019. However, given property prices will likely trend lower, weaker-than-expected margins will be a key risk.
"Three red lines" and tighter funding lead to more polarization. Smaller developers will depend more on cash generation and project
completion ability to sustain their business and liquidity, especially challenging for those that are thin on land reserves. We foresee
negative rating actions on increasing refinancing and liquidity risks for some of these weaker players, although the recent buoyant
offshore issuances have helped some to bolster their liquidity to a certain extent.
Given the fragmented nature of China's property market and its high leverage, more than 50% of rated Chinese developers are in the 'B'
rating or lower categories. However, they are not all small entities. Even for the small ones, we expect them to continue to have funding
access under normal market conditions, so long as their operating performance stays intact. The ones facing liquidity issues are either
struggling in generating sales or having capital structure issues. These companies account for less than 10% of the overall rated ones.
Matthew Chow
Hong Kong
matthew.chow@spglobal.com
+852 2532 8046
spglobal.com/ratingsdirect Feb. 9, 2021 7Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
India Abhishek Dangra
Singapore
Neel Gopalakrishnan
Singapore
Quick Recovery Reduces Risks abhishek.dangra@ neel.gopalakrishnan@
spglobal.com spglobal.com
+65 6216 1121 +65 6239 6385
Key Takeaways Rating Distribution
AAA
− A sharper recovery than we expected in fiscal 2021 has reduced the rating AA+
downside over the next 12 months. AA
AA-
A+
− Most sectors will likely report higher earnings in fiscal 2022 compared with a A
year earlier, especially sectors such as automobiles. A-
BBB+
BBB
− We project credit ratios for rated companies will revert to pre COVID-19 levels in BBB-
early fiscal 2022 in our base case. However, leverage in the infrastructure sector BB+
BB
is likely to stay elevated amid steady spending and delays in receivable BB-
collection. B+
B
B-
CCC+ and below
Economic revival, COVID-19 control should spur demand. The recovery in the Indian
0% 5% 10% 15% 20% 25%
economy broadened in the third quarter of fiscal 2021 (October to December 2020), with
demand for rated companies in the passenger vehicle, power, and ports segments being
above 2019 levels. COVID-19 cases remain high in India, but they are far from the peak. Outlook Distribution
Localized containment efforts have replaced nationwide lockdowns, limiting economic Negative* Stable Positive§ Others
costs. The vaccination process has started despite some concerns on efficacy. Recovery in
All 25% 68% 3% 3%
demand has been sharper than we expected aided by revival in economic activities and a
sharp increase in commodity prices. Labor and supply bottlenecks due to the sudden and SG 36% 50% 7% 7%
unexpected lockdown in March have now been largely resolved. IG 14% 86%
We expect strong earnings growth in fiscal 2022, with most sectors performing better 0% 20% 40% 60% 80% 100%
than in fiscal 2021. From an earnings perspective, we expect all sectors barring airports
and consumer retail to return to at least the fiscal 2020 level by the start of fiscal 2022
(quarter starting April 2021). For corporates, we expect EBITDA growth in fiscal 2022 to Outlook Distribution (Main Sectors)
range from 10% to as much as 50% over the previous year, depending on the sector. The
sectors that were more resilient in fiscal 2021 (information technology, pharmaceuticals) Negative* Stable Positive§
would be at the lower end of our expected growth, while auto, which was one of the worst
hit sectors, should post above-average growth. We anticipate solid earnings growth for
Metals and mining
commodity producers, based on our current oil and metal price expectations. Regulated
utilities will maintain strong operating resilience supported by regulated returns. The
broader port sector should regain volumes in fiscal 2022 but airports are unlikely to Oil and gas
recover to pre-COVID 19 levels before fiscal 2024. Power demand has already passed 2019
pre-COVID 19 levels, even reaching peak demand in recent months.
Infrastructure†
Earnings recovery for corporates has reduced risks. Our base case captures credit
metrics improving throughout fiscal 2022; they are in most cases likely to be stronger than
High technology
at the end of fiscal 2020. This expectation has reduced immediate downside rating
pressure, and we have also revised the rating outlooks for a few entities to stable from
0% 50% 100%
negative. However, the improvement in credit metrics are more earnings driven rather than
due to a sustainable reduction in debt. The recovery is therefore vulnerable to earnings
swings. Further, ratings prior to the pandemic were largely based on deleveraging Median Item Growth
expectations, which have been delayed by at least a year due to the pandemic. Hence, we India Rated Universe
do not see upside rating pressure for now. Fiscal Fiscal Fiscal
2021E 2022E 2023E
Leverage to remain high for infrastructure companies. In the infrastructure and utilities GDP Change (%) YOY -7.7 10 6
sector, we project continuing elevated leverage because earnings and debt have largely Revenue change (%) YOY -5 to 5 5 to 15 10 to 20
regained their pre-COVID-19 rising trajectory. The ratio of debt to EBITDA remains above EBITDA change (%) YOY -10 to 5 10 to 20 15 to 25
6x. Delay in receivables collection and higher capital expenditure than we expect will be Capex change (%) YOY -30 to -20 -15 to flat -10 to flat
two analytical drivers that could increase the rating pressure. Ratings data as of Jan. 28, 2021. *Negative
Credit differentiation continues despite lower funding costs and improving access to includes placements on CreditWatch negative.
funds. Domestic borrowing costs have fallen and abundant liquidity in capital markets has §Positive Includes placements on CreditWatch
supported dollar bond funding for higher rated and repeat issuers. Credit differentiation positive. IG--investment grade. SG--
between investment-grade and high-yield credits continues, perhaps more in pricing than speculative grade. YOY--year on year.
in access. Lower-rated Indian corporates are still constrained by regulatory pricing caps
and are exploring alternative funding through rupee loans or new structures to avoid the
pricing caps.
spglobal.com/ratingsdirect Feb. 9, 2021 8Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
The most likely downside credit scenario assumes is a second virulent wave. Mutations
to the coronavirus can pose additional risk of lockdowns in India (like those in Europe), and
severe lockdowns can impose significant economic penalties. This can result in sudden
cash flow pressures that could halt improvement in credit metrics. Sectors such as
automobiles, which have benefitted from a strong operational recovery, would be at higher
risk. Sectors such as consumer retail, which are in early stages of recovery with rising
mobility, could also feel the pain. Companies in commodity-related sectors would lose
their improving momentum if commodity prices lose strength or if a potential lockdown has
material economic implications. Some infrastructure companies are also raising their
growth and capital expenditure plans in light of the recent recovery. An acceleration in
spending can pose additional risks if the recovery proves temporary.
India Power Sector Outlook:
Look Out For Receivables And Counterparty Risks
The power sector accounts for more than 30% of our rated non-financial entities in India. In our view, receivables and not operating
EBITDA are the key monitorable factors for the sector. Revenue and earnings remain resilient. However, we believe 2021 will weaken the
credit profile of distribution companies (Discoms). This will in turn worsen working capital for generation and transmission companies due
to delayed payments. The sector's leverage is likely to be high at above 6x and its interest coverage, which is less than 2x for many private
players, could worsen.
In 2020, the government's Discom Liquidity Relief Package of over US$15 billion has helped alleviate some liquidity pressures. About 30%
of the amount was released to pay overdue receivables while the remaining has been sanctioned and should be disbursed over the next
few months. In the Budget for fiscal 2022, the government announced additional measures to support Discoms, but past efforts to repair
the ailing sector have met with limited success.
Structural issues of high leverage, unsustainable capital structures, and high technical and commercial losses for Discoms remain
unresolved. These company's also have a high interest burden (including on liquidity loans under the program). States’ weakened financial
positions will further reduce their ability to support Discoms.
spglobal.com/ratingsdirect Feb. 9, 2021 9Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Indonesia Xavier Jean
Singapore
More Debt Restructurings Or Defaults Likely In 2021 xavier.jean@
spglobal.com
+65 6239 6346
Key Takeaways Rating Distribution
− Profit recovery to pre-COVID-19 level in the Indonesian corporate sector is likely AAA
AA+
to be among the longest in Asia as new cases continue to climb and consumer AA
sentiment stays subdued. Its vaccination program has just rolled out and will AA-
A+
take time. A
A-
− Further credit downside is likely in 2021. Nearly 55% of rated entities currently BBB+
BBB
have a negative outlook, with half of them facing liquidity or refinancing risk this BBB-
year. BB+
BB
BB-
− We expect more defaults or debt restructurings to take place in 2021 in the B+
commodities, retailing, light manufacturing, and state-owned sectors. B
B-
− Domestic funding is likely to stay selective. Foreign capital markets have been CCC+ and below
recently opened for weaker issuers but this may be short-lived unless investors 0% 5% 10% 15% 20% 25%
become confident that the pandemic has stabilized.
Outlook Distribution
A recovery to pre-COVID-19 level could stretch to the second half of 2022, six to 12 Negative* Stable Positive
months later than in other countries in Asia. The revenue and profit recovery timeline is
broadly consistent with the one we had estimated in July 2020. COVID-19 cases in All 54% 46%
Indonesia have not yet stabilized, despite a vaccine roll-out by the government and an SG 50% 50%
ambitious plan to vaccinate two-thirds of the population by the end of 2021. The logistical
IG 67% 33%
challenges of a comprehensive vaccine roll-out in a country such as Indonesia are large,
given the geography, infrastructure, and administrative capabilities. We don’t think 0% 20% 40% 60% 80% 100%
consumer confidence is likely to stabilize or improve unless new cases sharply slow down
and consumers have the impression that the pandemic is under control. Sector wise, ports,
consumer discretionary, and light manufacturing are unlikely to recover to pre-COVID-19 Outlook Distribution And Rationale
levels until the second half of 2022. Sectors such as construction, real estate, and cyclical
Stable Negative
transportation are unlikely to recover before 2023. We expect the essential consumer, Leverage Sovereign
essential retail, electricity, and road sectors to recover to pre-COVID-19 levels by the end of Liquidity & Refinancing
2021. 100%
80%
Ratings are tilted to the downside, and more defaults are likely in 2021. The Indonesian 54% 50%
corporate sector has the highest negative rating bias in the region, with nearly 55% of
60%
outstanding ratings on negative outlook or CreditWatch negative. Tight liquidity or refinancing
risk is the underlying reason for nearly half of the negative outlooks, followed by sovereign risk 40%
(about one-third), and leverage. Our projections still indicate that credit metrics of nearly 40% 36%
46%
of our rated universe will be weaker in 2022 than in 2019, despite our current base case of a 20%
10% increase in profit on average at rated companies in 2021 over 2020. Nearly one-third of 14%
0%
our ratings in Indonesian companies are in the 'B-' and 'CCC' categories, which indicate that
Outlooks Rationale
more defaults or debt restructuring are likely in 2021. We believe the unrated state-owned
enterprise (SOE) sector will also continue to face significant hurdles in 2021 with more debt
restructuring likely as debt continues to climb amid reduced revenues and tightening liquidity Median Item Growth
(see box below). Indonesia Rated Universe
2020 2021E 2022E
Bank funding is likely to stay tight and highly selective throughout 2021 amid a surge in
GDP Change (%) YOY -1.7 5.4 5.2
nonperforming loans at domestic banks and despite the extension of a debt moratorium to
Revenue change (%) YOY -15 to -10 10 Flat to 5
2022. This is likely to hit mostly working-capital-intensive sectors such as textile, light EBITDA change (%) YOY -15 to -10 5 to 15 Flat to 5
manufacturing, retail, and real estate amid a sharp fall in activity. There are signs that the Capex change (%) YOY -5 to flat 5 to 15 Flat
renewal of credit lines is increasingly protracted, especially for smaller entities, with often
more stringent terms, including for well-established borrowers. Capital markets are opening
for lower-rated issuers (after nearly none in 2020). But the funding window could be short- Data as of Jan. 28, 2021. *Negative includes
lived as COVID-19 cases are yet to stabilize and a comprehensive vaccine roll-out could be 18- placements on CreditWatch negative. IG --
24 months away. Capital market funding (both domestic and international) is likely to remain Investment grade. SG -- Speculative grade.
solid for higher-rated credits in the 'BB' category or investment grade issuers.
YOY--year on year.
spglobal.com/ratingsdirect Feb. 9, 2021 10Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
SOE Sector Outlook:
An Increasingly Polarized Sector With More Defaults Or Restructuring Likely In 2021 At Unrated SOEs
Leverage in Indonesian SOEs will keep growing amid steady spending and subdued operations. Their stand-alone credit profiles are
likely to further erode in 2021. We project the median gross debt-to-EBITDA ratio to be 6.5x-7.5x in 2021 at listed companies (which are
usually the more solid and commercially oriented ones), a further increase from 2020. Although capital spending moderated in 2020 from
2019, it is likely to stay high in 2021. We project more than half of listed and rated SOEs to still burn cash in 2021 as COVID-19 disruptions
have brought cash flows and profit growth to a halt.
Funding is becoming more selective even to well-established SOEs as government support wanes. The lack of timely government
support for the recent SOE defaults had led domestic banks to be more selective to the sector, especially to those without a clear social
purpose. Debt restructuring now appears to be the preferred path for domestic banks to deal with vulnerable assets rather than
refinancing the debt or extending additional lines, judging from recent comments by the management teams of the large Indonesian
banks. The roll-over of working capital facilities or back-up refinancing in the construction, agribusiness, commodity or transportation
sectors no longer appears to be a sure thing as they might have been as recently as 2018. We expect domestic and capital market funding
to remain widely available and inexpensive in 2021, however, for SOEs with the most important public policy roles, such as PT Pertamina
(Persero) and PT Perusahaan Listrik Negara (Persero), further polarizing funding availability within the sector.
More debt restructurings are likely for more leveraged unrated SOEs as the government is unlikely to shift its support stances. We
revised our expectations of government support to its state-owned sector in early 2020. That followed a growing number of SOE defaults
or restructurings and a weakening ability of the government to provide a blanket support to its most leveraged SOEs regardless of their
policy roles. We see no likelihood that the government will walk back from this more selective stance in 2021 despite rising defaults as it
prioritizes vaccine roll-out and support to the wider economy. We don’t view the recent announcements of a possible asset injection in a
state-owned palm-oil holding company as a shift in the government stance, given it does not alleviate immediate liquidity stress and
near-term default risk.
State-Owned Companies
Gross debt Debt/EBITDA Net debt/EBITDA
1,600 8
Gross and net debt/EBITDA (x)
1,400 7
1,200 6
1,000 5
IDR (tril.)
800 4
600 3
400 2
200 1
0 0
2012
2013
2014
2015
2016
2017
2018
2019
2020F
2021F
Aggregated gross reported debt of the 20 listed and rated SOEs. Reported debt excludes
off-balance-sheet liabilities such as pensions or leases, and power-purchase agreements
for PLN. The red lines indicate a range for the projected debt/EBITDA in 2020 (based on 9
months 2020 results) and 2021. F--Forecast. IDR-- Indonesian rupiah. tril.--Trillion.
Sources: S&P Global Ratings estimates, company financial statements.
spglobal.com/ratingsdirect Feb. 9, 2021 11Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Real Estate Sector Outlook:
Indonesia Property Sector Outlook: Reducing Likelihood Of Near-Term Defaults But A Long Road To
Recovery
Marketing sales unlikely to recover to pre-COVID levels until 2023 for some. Cautious consumer sentiment and strict property measures
will constrain the recovery of residential marketing sales through 2022. We expect marketing sales for the five rated developers to grow
25% in 2021, after declining by 30%-35% in 2020. Rated developers are increasing their marketing efforts through online channels and
offering affordable landed housing which appeals to buyers. Developers relying on land sales are likely to be the last to recover. Land
sales are unlikely to pick-up meaningfully until international travel resumes between Indonesia and North Asia, a resumption that could
take many quarters depending on the roll-out and effectiveness of vaccination efforts.
The likelihood of near-term defaults has eased but credit risk in the sector remains high. We see lower risk of near-term defaults in the
next six to twelve months given the debt maturity profile of most rated issuers (except PT Alam Sutera Realty Tbk.) is beyond 2022. The
two rated developers with mounting liquidity and refinancing challenges defaulted in 2020. S&P Global Ratings rates three Indonesian
real estate developers out of five at the ‘B-’ rating level or below, suggesting lingering credit risk in this sector. Even under the marketing
sales pick-up scenario in our base case, we don’t envision a meaningful improvement to rated developers’ credit quality just yet. Sales
stay well below their 2017-2019 levels, price discounts will be needed to move volumes, and slowing construction activity to conserve
liquidity over the last twelve months will translate into weaker development completion, and hence revenues and margins. We also see
continued negative discretionary cash flow this year for most developers even in the best-case scenario (see chart).
Funding access for the sector to remain selective. We expect investor sentiment to remain cautious on the back of the sector’s recent
defaults and while negotiation between PT Modernland Realty Tbk., which defaulted in 2020, and its bondholders remains in limbo.
Developers will try to diversify their funding domestically, however the depth of bank funding is typically limited, with a high degree of
selectivity within the real estate sector.
Simon Wong
Singapore
simon.wong@spglobal.com
+65 6239 6336
Discretionary Cash Flows Sensitivity for 2021
Real estate
Downside case Base case Best case
200
0
(200)
Bil. IDR
(400)
(600)
(800)
(1,000)
Alam Sutera PT Lippo Jababeka Pakuwon
Karawaci
Tbk.*
Discretionary cash flows are operating cash flows minus capital spending minus dividends. Best
case – assumes sales returning back to around pre-COVID level. Downside case – flat marketing
sales growth from 2020. *For Lippo, the sensitivity assumes net proceed receipts from the sale of
the Puri mall of IDR1 trillion, and lease payments to First REIT of IDR800 billion. Bil.--Billion. IDR -
- Indonesian rupiah. Source: S&P Global Ratings estimates.
spglobal.com/ratingsdirect Feb. 9, 2021 12Asia-Pacific Corporate And Infrastructure Credit Outlook 2021
Corporate Top Trends Update
Japan Katsuyuki Nakai
Japan
Makiko Yoshimura
Japan
Tough Times Could Prolong katsuyuki.nakai@ Makiko.yoshiumura@
spglobal.com spglobal.com
+81 3 4550 8748 +81 3 4550 8368
Key Takeaways Ratings Distribution
AAA
− Rating downside is likely in 2021 for companies in Japan, with nearly 40% of AA+
ratings having a negative outlook. This is after a multi-year high number of AA
AA-
downgrades in 2020. A+
A
− Debt will likely further increase in 2021, delaying a recovery in credit metrics to A-
BBB+
2022 for most sectors. This is despite our expectations of a pick-up in profit in BBB
2021. Sectors such as automobile and railroad operators, where revenue and BBB-
BB+
profit were hit the most by the COVID-19 pandemic, are unlikely to recover until BB
2023 (as we earlier anticipated). BB-
B+
B
− Spending discipline and financial policies are likely to stay a focus for our credit B-
analysis of Japanese companies as mergers and acquisitions (M&As) and CCC+ and below
steady growth spending are set to continue in 2021. 0% 5% 10% 15% 20% 25%
− Liquidity and access to funding are likely to stay solid through 2021. Our rated
Japanese companies comprise investment-grade issuers with ample cash Ratings Statistics (2020)
IG SG Total
balance and well-established funding relationships.
Ratings 71 6 77
Downgrades 16 3 19
Rating pressure continues in 2021. As of January 2021, about 40% of Japanese Outlook changes to negative* 11 2 13
companies have negative outlook or are under CreditWatch with negative implications. Net Upgrades 0 0 0
negative rating bias grew to -38% as of December 2020, slightly higher than six months
Outlook changes to positive§ 0 0 0
ago (-32%). The bias remains despite a large number of downward rating actions in 2020--
downgrades of nearly one in four rated companies and downward outlook revisions for one
in five. Even though we have incorporated some earnings recovery in 2021, we believe Outlook Distribution (Main Sectors)
companies in the automobile, transportation, and capital goods sectors have limited rating Negative* Stable Positive§
buffer against further downgrades. This is also true for some technology companies--for
example office equipment makers--with negative outlook. In light of potential large asset Automobiles
impairment losses from investments in natural resources or commodity businesses,
Retail
general trading and investment companies (GTIC) could face severe business
circumstances. This will increase downward pressure on the ratings and may lead to High technology
outlook revisions to negative from stable. Regulated utilities
Recovery pace will vary across industries. In our view, a rebound for automobile original Consumer products
equipment manufacturers (OEM) and auto parts companies in Japan will be particularly Real estate
slow because we project global unit car sales in 2022 will still be 5% below 2019 levels. The
Capital goods
recovery in operational performance in related sectors, including industrial materials,
capital goods, and electronics, will also be gradual. Railroad passengers in Japan are likely Infrastructure†
to increase only gradually as pandemic-driven fears ease. On the other hand, we believe 0% 50% 100%
operational performance in some industries will remain stable. These include telecom and
healthcare, which have remained resilient amid the economic slowdown. Acceleration of Median Item Growth
digitalization can benefit information technology (IT) services companies while a strong Japan Rated Universe
shift to online services is likely to support e-commerce businesses. 2020 2021E 2022E
GDP change (%) YOY -5.5 2.7 1.3
Financial metrics to recover only moderately in 2021. In our base case, we expect the
Revenue change (%) YOY -15 to -10 5 to 10 Flat to 5
aggregated debt/EBITDA of rated issuers in Japan to moderately recover to about 2.2x in
EBITDA change (%) YOY -25 to -20 20 to 25 5 to 10
2021 from 2.7x a year earlier. This metric was 1.8x in 2019. Although we assume aggregate
Capex change (%) YOY -5 to flat Flat to 5 -5 to flat
EBITDA will rise by more than 20% in 2021 compared with 2020, a recovery to pre-COVID
levels is unlikely until 2022. Also, as seen in the technologies sector, we expect rated Ratings data as of Jan. 28, 2021. *Negative
issuers to continue to make large growth investments on M&As and group reorganizations includes placements on CreditWatch negative.
in 2021. Therefore, we anticipate aggregated debt will grow by 1%-2% in 2021, following a §Positive Includes placements on CreditWatch
significant increase in 2020 (+14% year on year). positive. † Includes power and transport
infrastructure. YTD--year to date. IG--
investment grade. SG--speculative grade. YOY-
-year on year.
spglobal.com/ratingsdirect Feb. 9, 2021 13Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 Corporate Top Trends Update Spending discipline to be a key rating driver. Over the past six months, 20%-30% of negative rating actions on Japanese corporates were triggered by large growth investments amid difficult business circumstances. The investments include for large M&As (Seven And I Holdings Co. Ltd.), aggressive growth (Tokyo Gas Co. Ltd.), and takeover of a subsidiary for group restructuring (Nippon Telegraph & Telephone Corp. and NTT DOCOMO Inc). We remain cautious on the financial burden from these investments. Meanwhile, growth investments for innovation and technology, scale expansion, or entry into new markets are essential for Japanese companies to maintain their competitiveness amid severe global competition. When assessing the rating impact of these investments, we also consider an issuer’s financial discipline and its efforts to mitigate the financial burden. For example, we have seen increasing numbers of issuances of hybrid securities by Japanese companies (Nippon Steel Corp., Japan Tobacco Inc., Aeon Co. Ltd., Rakuten Inc., Marubeni Corp., and Mitsubishi Estate Co. Ltd.) over the past six months. We also saw large asset sales by SoftBank Group Corp. and Bridgestone Corp. Solid liquidity and capital market access underpin the largely investment-grade ratings on Japanese companies. We rate more than 90% of our Japanese corporates 'BBB-' or above. Most of these companies maintain an ample cash balance. Relationships with domestic lender banks is also generally strong and well-diversified. We believe larger Japanese companies will maintain steady access to the capital market given the structural flight to quality globally, even in the most hot sectors such as auto. We saw, mega bond issuances by Takeda Pharmaceutical Co. Ltd., Nissan Motor Co. Ltd., NTT, and Seven & i Holdings (through its U.S. subsidiary 7-Eleven Inc.) in recent months. Automobile Sector Outlook: Auto And Auto Parts: Unit Sales To Remain Low Through 2022 In Slow Lane To Recovery Nearly 80% of the Japanese companies we rate in the sector have a negative outlook. We expect only a gradual recovery in global auto sales in the next two years, with sales in 2022 likely to stay below 2019 levels. Essential investments and research and development (R&D) spending to cope with new technologies and stricter environmental regulations will likely depress free cash flows compared with the historical average. We project a decent recovery in the average EBITDA margin to 9.0%-9.5% in fiscal 2021 (year ending March 31, 2022) from 6.5%-7.0% in fiscal 2020. It is still below fiscal 2019 level (9.6%). Among Japanese auto OEMs, we expect greater earnings pressure for Nissan Motor Co. Ltd. and Mitsubishi Motors Corp. We believe their EBITDA margin will remain at 3%-4% in 2021, while Toyota and Honda should have margins of 8%-10%. Nissan and Mitsubishi have a weaker product portfolio and brand recognition. In our view, Nissan’s product lineup is not as competitive as that of its peers because it has many aged models. Additional restructuring expenses (capacity reduction, office closures) are also likely to weigh on earnings in 2021. Large Japanese auto OEMs have unleveraged balance sheets when compared with most overseas peers. We expect Japanese OEMs to maintain their net cash position. Furthermore, their captive finance operations are likely to maintain sound asset quality and stable profitability thanks to conservative business management. spglobal.com/ratingsdirect Feb. 9, 2021 14
Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 Corporate Top Trends Update Electronics Sector Outlook: Sunshine Emerging Among The Clouds The sector’s net negative rating bias remains high at -50%. Earnings pressure will persist for certain subsectors and companies despite our expectation that global IT spending will return to a modest growth of about 3.4%. We estimate the office equipment market will grow about 1% in 2021, after a 15% drop in 2020, given work-from–home initiatives. Mature core businesses of hardware companies face harsh competition, constraining profitability in 2021. In contrast, acceleration of digitalization and 5G technology should help IT servicers and semiconductor manufacturers, respectively. We anticipate the sector's aggregate revenue will recover by about 4% in fiscal 2021, after dropping nearly 8% in 2020. EBITDA should also rebound by about 20% in 2021 (after a 22% fall in 2020). However, revenue or EBITDA are likely to still be below 2019 levels. For companies (including office equipment makers) with negative rating outlooks, the median EBITDA margin will likely recover only to slightly above 8% in 2021 from a little more than 7% in 2020. Companies with stable outlook will continue to demonstrate higher profitability, with median EBITDA margin of 13.6% in 2020, and 14.6% in 2021. The majority of rated companies in the sector have some financial cushion at the current rating because of their low leverage. We project median debt-to-EBITDA ratio in 2021-2022 to remain healthy at 1.2x-1.3x. The negative outlook on many of these companies is due to their weakened profitability in matured markets (such as printing) or due to COVID-19, not increased leverage. The risk for these issuers, in our opinion, is mostly about financial discipline: persistently large investments and sizable shareholder returns would not only diminish financial headroom but could also increase rating pressure. For example, Fujifilm Holdings’ increased investment for growth, and Sony’s acquisition of Sony Financial Holdings. spglobal.com/ratingsdirect Feb. 9, 2021 15
Asia-Pacific Corporate And Infrastructure Credit Outlook 2021 Corporate Top Trends Update Latest Related Research Asia-Pacific − Watch For COVID Tail Risk In Asia-Pacific, Panelists Say, Feb. 1, 2021 − Asia-Pacific Sovereign Rating Trends 2021, Jan. 28, 2021 − Metal Price Assumptions: Vaccinations To Restore Vigor In 2021, Dec. 18, 2020 − Asia-Pacific Forecasts Stabilize, Risks Now Balanced, Nov. 30, 2020 China − China GDP Recovery, Moratoriums, And Write-Offs Keep Banks' Bad Loans In Check, Feb. 2, 2021 − Economic Research: The Missing Factor In China's Remarkable Recovery, Jan. 19, 2021 − China’s New Curbs On Real Estate Loans To Flatten Sales, Jan. 6, 2021 − Energy Transition: Consumers Can Help Deliver A Carbon Neutral China, Dec. 10, 2020 − Do Recent SOE Defaults Indicate Systemic Risks? Dec. 3, 2020 − China Property Watch: Issuers Go On A Debt Diet, Nov. 12, 2020 − China Commodities Mega-Mergers: Increased Leverage Today, Efficiency Gains Tomorrow, Oct. 20, 2020 Japan − Japan Corporate Credit Spotlight: A Rough Road To Recovery, Oct. 22, 2020 Indonesia − Indonesian Banks Gird For Arduous Recovery From COVID, Feb. 1, 2021 − Banking Industry Country Risk Assessment: Indonesia, Nov. 30, 2020 − Indonesian Coal Miners Are Digging In For A Long Siege, Nov. 9, 2020 − COVID-19 Accelerated Financial Distress For Some Indonesia Property Developers, Oct. 8, 2020 India − India's Bigger Budget Is A Shot In The Arm For The Economy, Feb. 2, 2021 − Rising Demand, Falling Infections Temper India's COVID Hit, Dec. 15, 2020 − India Infrastructure Outlook for 2021, Nov. 23, 2020 Pacific − Australian and New Zealand Retail REITs: Pandemic Leaves Lasting Pain, January 10, 2021 spglobal.com/ratingsdirect Feb. 9, 2021 16
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