S&P Global gives itself a downgrade

Company News

by Glenn Dyer

You’d never believe it would you? One of the world’s leading financial ratings groups S&P Global has been forced to withdraw its 2022 guidance and outlook because it can’t drum up enough ratings business.

S&P Global said Wednesday it has halted its financial outlook for the full-year of 2022, citing “extraordinarily weak” market conditions for its ratings business.

And that warning should be seen as an early indicator that all is not well in some corners of the financial markets and perhaps the global economy.

S&P Global said it can’t affirm its previously provided outlook, and expects to reintroduce formal financial guidance with its Q2 earnings results (due in July, at this stage).

The company said “year-over-year declines in the high teens in debt issuance volumes can be expected. Rated, or billed, issuance could be down by 30% to 35% from a year earlier, while leveraged loan volumes could be down by about 40%.”

S&P Global said its ratings revenue may be “negatively impacted” by nearly $US600 million relative to previous revenue guidance and its ratings adjusted operating margin could be in the high 50s range.

A “high 50s” operating margin after a downgrade? That’s a gross margin any company would be proud to enjoy.

The problem emerged in the first quarter results release when the company said that “Ratings transaction revenue was negatively impacted by a sharp year-over-year reduction in debt issuance” and added that it saw a fall in profit margin in the quarter as a result.

That situation has clearly continued in the first two months of the June quarter and is not a one off restricted to the three months of this year.

The March quarter report gave an idea of the size of the hit to the company’s ratings business:

“Reported revenue decreased 15% to $868 million in the first quarter of 2022. Transaction revenue decreased 31% to $404 million. Transaction revenue was negatively impacted by a year-over-year decrease in debt issuance across all categories, but particularly within high-yield, which decreased approximately 68% year- over-year.”

So what’s the latest statement mean?

Well, look at the factors S&P Global cited in its short release:

“Debt issuance volumes have been extraordinarily weak year-to-date. Should similar trends continue through the end of 2022, market issuance could see year-over-year declines in the high teens. Rated, or billed, issuance could be approximately 30-35% lower than the previous year, and leveraged loan volumes could be approximately 40% lower.”

That’s a warning that there has been a sharp fall in demand for borrowed money by corporates so far in 2022. And the falls seem to be significant to cause financial pain to a company that usually collects revenue from good and bad times.

Rival Moody’s has also reported a similar situation with its ratings business, citing a fall of 25% in rated issuances in the first quarter in its quarterly report. Moody’s listed similar factors and mentioning the volatility in interest rates as the Fed and others in the markets grappled with rising inflation, the war in Ukraine and its impact as well as a big drop in high yield bond issues.

While the problems were well known in early May after the quarterly reports from the two ratings giants, S&P Global’s surprise announcement on Wednesday should be a heads-up for investors starting to focus on the June 30 quarterly reporting season starting in six weeks’ time, especially the big banks which are early reporters.

If the demand for borrowed funds has or is falling, banks must be seeing a falloff in loan and debt issuances, especially the giants like JPMorgan, Goldman Sachs, Citi, Bank of America and Morgan Stanley.

S&P Global’s warning is ironic. The ratings group quite often downgrades companies when revenues and profits come under pressure or a country when the economy hits a rough patch or something very negative happens (such as a change of government).

So will S&P Global’s rating rivals put the company on a creditwatch negative, as the ratings agencies do when there is bad news? A change from stable to negative would seem fitting – a bit like the way S&P has handled Australia’s credit rating a couple of times in the past decade when it got all weak-kneed over something that didn’t eventuate.

Rival Fitch Ratings has S&P Global on a single A- (stable outlook) rating after the company’s $US44 billion merger with IHS Markit late in 2021. Rival Moody’s has S&P Global on an A3 stable outlook rating.

Ratings changes from Moody’s and Fitch – at a minimum a change in outlook to negative – would test the independence of the sector which is still being questioned for the weak performance leading up to the sub-prime mortgage debacle and GFC in 2007-2010,

S&P Global’s stock hit new year lows Wednesday in the wake of the announcement and withdrawal of guidance.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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