The breadth of the economic shutdowns to contain the spread of the coronavirus will affect nearly every sector across the global corporate universe, writes the PGIM Fixed Income team.
Therefore, credit selection will be paramount to generating positive alpha.
In tackling a solvency and liquidity analysis across various global industries, the PGIM Fixed Income credit research team of more than 100 analysts started with the following base case assumptions: two quarters of negative growth in Q2 and Q3, and 12 weeks of a work from home/shelter in place environment - with most commercial locations closed except for essential goods and services.
The closures could imply a prolonged period of very little or no revenue for the most affected credits, which could also experience large swings in working capital if they need to offer refunds.
The respective industries were segmented into one of three buckets: minimal impact, material impact, or severe impact.
The buckets have different implications for investment grade and high yield credits.
Within investment grade, the minimal impact bucket indicates the industry may still be affected, but with minimal impact on our internal industry ratings.
The material impact bucket implies entities in these industries have a decent probability of being downgraded but will likely retain investment-grade ratings.
The significant impact bucket indicates a reasonable probability the industry ratings will be cut to below investment grade.
Within high yield, the segmentation focuses on EBITDA and free cashflow impacts in 2020 and, ultimately, the liquidity/default risk - rather than a specific ratings action.
In general, names in minimal-impact industries have an estimated 15%-25% impact on EBITDA and free cashflow, credits in material-impact industries have an expected 25%- 50% impact, and companies in the significant-impact industries have an anticipated impact of 50% or more.
The bucketing breakdown in the following table is dynamic, and industries can shift across categories depending on developments.