As the economy and the capital markets navigate toward a new normal, Fitch Ratings tracks how the pandemic affects its forecast fiscal 2020 performance, focusing on key liquidity benchmarks and how they evolve over time across industries and market segments.
Coverage Ratios Weaken
The overall forecast for median operating EBITDA/interest in Fitch’s portfolio weakened to 2.8x in mid-August from 3.2x at the end of March.
Between the end of March and mid-August, expectations for median operating EBITDA/interest ratios for 2020 weakened the most for Gaming, Lodging & Leisure (GLL); Transportation; Media & Entertainment (M&E); and Autos. Updated forecasts for these sectors, except GLL, suggest they will maintain relatively healthy coverage benchmarks, albeit weaker than what was forecast at the end of March. Mid-August EBITDA/interest medians are forecast at 3.3x for Transportation, 3.2x for Autos and 2.6x for M&E.
GLL and Transportation have high exposure to the disruptions caused by the coronavirus pandemic. Issuers in the M&E sector are mostly classified as having medium exposure to the virus. Social distancing rules were a main driver behind the meaningful decline in forecast coverage ratios for issuers in the entertainment field, such as cinemas and businesses involved with the organization of concerts and other live events. Fitch’s expectation for declines in advertising is another important driver behind the lower forecast median coverage ratio in M&E.
Operating EBITDA/Interest Paid Year 2020
Telecommunications Health Care Food, Beverage & Tobacco Diversified Services Consumer Chemicals Technology Diversified Manufacturing Building Materials & Construction Retailing Natural Resources Energy (Oil & Gas) Auto & Related Media & Entertainment Transportation Gaming, Lodging & Leisure
Source: Fitch Ratings.
Cash Positions Build Up
Fitch’s expectations for readily available cash at YE 2020 were higher in August compared with the beginning of the pandemic across all rating categories. This trend was especially pronounced in sectors with medium and high exposure to the pandemic, such as GLL, Retail and Healthcare. This is in line with expectations that most companies will look to avert a pandemic-induced liquidity crunch by keeping larger amounts of cash on their balance sheets.
2020 Readily Available Cash (% of Total Debt)
The Dash for Cash
In the first few months of the pandemic, Fitch observed a large number of companies drawing down on their revolvers in an effort to shore up cash and collected a sample of 350 U.S. and Canadian issuers. Among the most active sectors in terms of drawdowns were Retail, Consumer, GLL and Technology. Many of these drawdowns were later paid down with issuance of permanent debt.
In addition to revolver utilization, issuers have taken advantage of reopened capital markets to build up liquidity positions. The high-yield market has been especially active, with August bringing a record monthly issuance of $51 billion. An analysis of high-yield issuance by sector indicates GLL, Healthcare, Technology and Energy have been the most active in terms of issuance.
Liquidity sufficiency is an important consideration for Fitch when assessing an issuer’s susceptibility to default during the pandemic. Our analysis weighs the benefit of the improved liquidity position from incremental debt against the impact it may have on ongoing leverage.
Revolver Draws by Industry
Degree of Impact Varies Across Market Segments
Breaking the portfolio down by market segment sheds light on how forecasts for liquidity metrics evolved in the broadly syndicated market (BSL) compared with the middle market (MM), further broken down into traditional MM and lower middle market (LMM). Expectations for median operating EBITDA/interest declined the most in BSL, falling to a median of 3.5x in mid-August from 4.2x at the end of March. The decline in expectations for median coverage metrics for 2020 in the LMM, where coverage tends to be thinner compared with BSL, is more tempered, and the current forecast for median operating EBITDA/interest stood at 2.2x in mid-August, compared with 2.4x in March.
2020 Operating EBITDA/Interest Paid
