Fewer potential fallen angels in Asia

From a regional perspective, around 45% of the fallen angels since 2008 have been China-based companies. More recently, India or Korea-based companies also contributed to the fallen angel list since 2019. (Representative image)

By Annalisa Di Chiara & Ian Lewis

As of October 31, the number of companies most at risk of losing their investment-grade ratings—potential fallen angels (PFAs)—fell to 12 from 19 on September 30. The decline follows the change in India’s (Baa3 stable) outlook to stable from negative in early October. The long-term average has been 12 since 2008. Six India-based companies left the list. Five of the companies are government-related oil-and-gas companies whose outlooks changed to stable following the sovereign action, reflecting state ownership or close links with the government.

Of the five companies, three are government-related issuers (GRIs)—Oil and Natural Gas Corporation Ltd. (ONGC) (Baa3 stable), Oil India Limited (OIL) (Baa3 stable) and Indian Oil Corporation Ltd (IOCL) (Baa3 stable). We stabilised Hindustan Petroleum Corporation Ltd.’s (Baa3 stable) outlook because its ratings incorporate our expectation of support from the government of India (Baa3 stable) through ONGC. Petronet LNG Limited ‘s (Baa3 stable) rating was also stabilised following the rating actions on key counterparties, including IOCL and BPCL (Baa3 negative).

Still, the outlook on BPCL’s ratings remains negative and reflects uncertainty around its ownership, capital structure, liquidity and management control given the ongoing process by the government to sell its stake in the company. As a result BPCL remains on the potential fallen angel list.

Cement producer UltraTech Cement Limited is the sixth India-based company that left the potential fallen angels list. The company’s ratings are capped at India’s sovereign rating. As a result, we affirmed its issuer rating at Baa3 and changed the outlook to stable from negative, in line with the sovereign rating outlook.

Potential fallen angels account for around 5% of investment-grade companies. This is down from a high of 9.7% (or 20 companies) reached during the height of the pandemic in 2020. The effects of the pandemic are easing and economic recovery is taking shape, supporting a decline in potential fallen angels.

Five companies became fallen angels since the pandemic began early last year. In 2020, there were four fallen angels—Motherson Sumi Systems Limited (Ba1 stable), E Mart Inc. (Ba1 negative) Zhuji State-owned Assets Management Co., Ltd. (Ba1 stable) and Zijin Mining Group Company Limited (Ba1 stable). In October 2021, Lanzhou Construction Invt (Hldg) Grp Co Ltd (Ba1 negative) fell into high-yield territory.

This brings the total to five fallen angels since January 2020, similar to the number recorded during the commodity crisis over the two years of 2015 and 2016. In March 2020, India-based auto-part supplier Motherson Sumi Systems Limited’s (Ba1 stable) downgrade primarily reflected vulnerability to shifts in market sentiment and consumer spending. The company’s positioning in the Baa3 rating category was already weak before the market stress induced by the pandemic.

Most fallen angels remain in the high-yield space. The number of companies transitioning to high yield from investment grade remains relatively low in Asia. But, once fallen, most companies have remained in high-yield territory, largely in the Ba1/Ba2 category. A few have been downgraded even further. Of the 30 fallen angels in Asia since 2008, only two companies, Shanghai Huayi (Group) Company (Baa3 stable) and Kia Corporation (Baa1 stable), climbed back to investment grade.

The 12 potential fallen angels have around $28 billion of bonds outstanding; around $3.2 billion is due by year-end 2022 (based on earliest put date). Refinancing would likely be more costly for these companies if their ratings were downgraded to high yield. Moreover, fallen angels have the potential to crowd out lower-rated companies, which would raise debt-service costs and refinancing risk for some such companies. This scenario would drive credit differentiation, with refinancing risk for weaker and highly leveraged companies likely to rise.

From a regional perspective, around 45% of the fallen angels since 2008 have been China-based companies. More recently, India or Korea-based companies also contributed to the fallen angel list since 2019.

Respectively, senior vice-president and associate managing director, Moody’s

Excerpted from Moody’s Investor Services report on Non-financial Companies (ex Japan & Australia), dated November 8