Various bonds rating from single C to AAA

With downgrade activity continuing to outpace upgrades, global corporate credit ratings face further downside risk in the year ahead, Fitch Ratings says.

In a new report, the rating agency said that for global non-financial corporates, downgrades outnumbered upgrades in the fourth quarter.

“Downgrades were concentrated among speculative-grade issuers, which are generally more susceptible to the economic slowdown, high inflation and rising interest rates,” it said.

The ratings outlook also skews slightly negative, with 12% of Fitch’s outlooks negative, 8% positive, and 80% stable.

“Weakening macroeconomic conditions could pressure operating performance and recent rating and outlook revision trends imply some downward risk exists, particularly in North America and Europe,” it said.

Indeed, both regions saw a modest increase in negative outlooks in the fourth quarter, Fitch said, whereas the percentage of negative outlooks in the Asia Pacific region declined sequentially in each quarter last year.

“The primary factor driving negative rating actions was different for each region,” Fitch said — noting that downgrades in North America were driven by shifting financial conditions, liquidity risk was the primary driver in Asia Pacific, and European downgrades were driven by sector-wide market changes.

At the same time, positive rating actions were generally due to issuer-specific factors, it said.

In a separate report, Moody’s Investor Service said that it expects U.S. corporate defaults to accelerate in 2023, after doubling in the fourth quarter, which is “a sign that economic challenges are taking a growing toll on weaker issuers.”

Moody’s said that it expects defaults to keep rising in the months ahead, with the 12-month trailing default rate to rise to close to 6% by year-end, up from just 2% today, and above the long-term average of 4.7%.

Industry outlooks and Moody’s proprietary risk indicators also point to elevated defaults, it noted.

“Our intrinsic liquidity indicator is also getting worse, pointing to a build-up of companies with weakest liquidity ratings,” it said.