October 2024 Edition
Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.
Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.
2025 North American Industrial Real Estate Sector Outlook: Soft Landing Expected in the New Year
The North American industrial real estate sector is currently experiencing an inflection point, as market dynamics seem to rebalance. A combination of record amounts of new supply delivered in 2023, unleased speculative supply set to deliver later this year, and an increase in sublease offerings are contributing to softening fundamentals in select North American markets. However, our outlook remains stable for North American industrial real estate.
We expect demand for the broader industrial market to mimic overall economic performance more closely.
Strong occupancy resulting from underlying long-term leases, key geographic positioning, and positive same property net operating income growth should continue to underpin cash flow stability amongst our rated issuers that have significant exposure to the industrial asset class.
Branded Versus Private-Label Consumer Staple Products: The Battle Continues
In 2022 and 2023, sales of private-label consumer staple products grew considerably more than those of their branded counterparts, and now account for around 40% and 20% of the total grocery market value in Europe and the U.S., respectively.
These products have won favor with customers not only because of their attractive price tags, but also because such private-label CSPs have become brands themselves, benefitting from years of investment by grocers in product innovation, branding, and packaging and marketing.
However, we expect the credit risk profiles of larger consumer product companies to withstand the pressure from private-label CSPs because of the breadth of their product offering within different price tiers.
U.S. Investment in Battery Energy Storage Systems Shows No Signs of Slowing Down
Stationary Battery Energy Storage Systems (BESS) are a critical piece in the transition to reliance on renewable energy—specifically wind and solar power generation. BESS store power when supply outpaces demand and create redundancy or balance for a more resilient grid.
Given the U.S. government's commitment to achieving a carbon-free power sector by 2035 and a net-zero emissions economy by 2050, we think investment in BESS is likely to intensify.
We expect investment in BESS to continue growing as the power sector becomes increasingly reliant on intermittent renewable energy generation and federal support in the form of tax credits under the U.S. Inflation Reduction Act creates complimentary incentives for investors and developers.
Thames Water: Uncertain Picture for Now, Could Add to UK Government's Fiscal Pressures
At this moment, the prospects for re-nationalization are unclear.
If Thames Water were to be re-nationalized, it is unlikely to have a significant impact on the UK's fiscal position. However, it would add to the existing spending pressures at a time when the new UK government aims to boost economic growth through private and public investment.
In our view, increased spending on troubled utility companies could limit the government's capacity to fund public investment that could help bolster economic growth.
U.S. RMBS Frontline Perspectives: Mortgage Rates Hold Lower, Industry Activity Mixed, Home Prices Steady. In Focus: September RMBS Statements Show Modest Movement
Benchmark Treasury yields edged back up over the past few weeks post-Fed rate cut with the 10-year yield now at 3.81%. Meanwhile, mortgage rates held relatively steady for now as the most recent September 26, 2024, Freddie Mac Primary Mortgage Market Survey data release had the 30-year mortgage at 6.08%, just one basis point lower from the prior week.
Final GDP for Q2 2024 came in at +3.0%, right at consensus estimates and above Q1 2024's revised +1.6% growth. Elsewhere, personal consumption expenditures remained slightly above Fed targets, and consumer sentiment improves modestly.
According to data from Finsight, RMBS total deal pricings for September finished at about $16.3 billion, the highest monthly volume level of 2024, which followed the lowest volume month in August.
European Auto ABS: Credit Performance Deteriorates (but Moderately) with Issuances at Record
In European auto asset-backed securities, arrears and defaults continued to slightly increase this year, while used car prices bottoming out in certain countries limited weakening recoveries and residual value performance. At the same time, issuance of European auto ABS maintained full speed ahead.
Despite the humble performance of new car and used car purchases, auto ABS captive and noncaptive originators have not slowed down their lending activity in Europe thanks to high new vehicle prices and used car financing.
Compared with previous years, year-to-date issuances showed different but interesting trends:
We expect credit ratings to continue to remain stable, considering borrowers have been resilient to deteriorating macroeconomic metrics and prices in the used car market showed signs of stabilization.
U.S. Port Strike: Limited Impact on Auto Finance Companies’ Earnings
On October 1, 2024, roughly 45,000 members of the International Longshoremen's Association (ILA) went on a labor strike. As a result, 36 ports along the East and Gulf Coasts of the U.S. have shut down. According to the Bureau of Transportation Statistics, the East Coast and Gulf Coast Ports handled around 61% of vehicle imports and 84% of vehicle exports in 2022.
Overall, we expect the potential impact to the financial performance of auto finance companies to remain very modest with no impact to the credit ratings of those we cover.
Nonetheless, should the Port strike last longer, new vehicle availability could become more challenged leading to lower new vehicle sales creating a headwind for auto finance companies' origination volumes and their ability to grow earning assets, impacting revenue generation.
Immaterial Direct Global Banking Exposures to the Middle East, but Further Escalation May Dampen Economic Growth
Tensions continue to escalate in the Middle East with fears of a wider conflict rising dramatically over the past several days.
While no banks in our global coverage universe have any material direct exposures to this geographic region, knock on effects from a wider conflict could be considerable.
At present, oil prices are still down relative to 2022-2023 averages. Nonetheless, a wider conflict could lead to an oil price shock that would complicate the outlook for inflation and dampen spending by consumers and businesses.
If economies do deteriorate, loan loss provisioning/the cost of risk will likely increase pressuring profitability.
Growing Footprint of Private Credit in Structured Finance
The size of the private credit market stands at around USD 1.5-2 trillion today and is expected to rise to USD 5-10 trillion within the decade. To put things in perspective, in 2009 the size of this market was estimated at roughly USD 200 billion - there has been a huge growth in the last decade and a half. The growth has come from not only a growth in size but also in scope.
Issuance in private credit slowed down a bit with recent rate movements but is stabilizing.
The initial rate movements over the past year or two resulted in a greater proportion of portfolios experiencing credit deterioration. However, our credit estimate snapshot for Q1 now has a lower proportion of CCCs in the portfolio than in previous years.
Approach to Data Set
The figures above are based on data from Morningstar DBRS’s proprietary database (ratings from January 1, 2023 to September 30, 2024). The data set includes public and private ratings in all sectors. Morningstar DBRS tabulated confirmations, upgrades, and downgrades at the issuer level; as such, where there are multiple debt security ratings, Morningstar DBRS only used the issuer rating or its proxy for corporates, sovereigns, and FIG sectors, and only used the trust rating for its proxy for structured finance. Morningstar DBRS did not include under review or trend change rating actions in the tables.
Rating actions were counted by aggregating ratings across company IDs and taking the mode of the rating action. As such, in some cases ratings activity may be overstated. For example, Credit Suisse Group AG and Credit Suisse Group Finance (U.S.), Inc. will have two unique company IDs and will thus yield two different ratings counts in our data despite being from the same company.
Morningstar DBRS aims to remove the impact of overstating rating activity by issuing subsidiaries and affiliates (together, related entities) on the data set in cases where there is a direct relationship to the parent company’s rating. The objective of this adjustment is to eliminate the impact of migrating a series of ratings that ultimately rely on one entity. Please note that this approach is specific for the purpose of this newsletter, and may not be consistent with other rating activity summaries produced by Morningstar DBRS for other purposes (such as the transition study data tabulated for the NRSRO).