‘Hidden’ Debtors May Be Signaling Trouble in the Global Economy

  • With the global economy slowing down, an analysis by S&P Global Market Intelligence finds unrated borrowers showing an increasing risk of defaults.
  • Small companies without credit ratings are likely to be the first victims in an economic downturn, says Michelle Cheong of S&P Global Market Intelligence.
  • She says unrated firms in China, the U.K. and the technology sector in Asia Pacific are among the most at risk of a sudden spike in defaults.

 

While investors look for clues about the health of the global economy, a research and analytics unit under S&P Global said a “hidden” segment of debtors is flashing early signs of trouble.

Those borrowers are small companies that are not rated by S&P Global Ratings, according to the agency’s sister division, S&P Global Market Intelligence. A credit rating is an assessment on a government or company’s ability to repay its debt.

There are many reasons why borrowers choose not to seek a credit rating, including cost savings, infrequent bond issuance and investors’ familiarity with the brand. Well-known companies that have in the past opted against a credit rating include Italian luxury fashion house Prada and German sportswear brand Adidas.

The unrated entities are like the canary in the mine. They are the ones that usually start to default first — before you see trouble happening among the rated entities — because they are the weaker link.
Michelle Cheong
DIRECTOR, S&P GLOBAL MARKET INTELLIGENCE

Generally, though, many entities without an S&P credit rating are small companies that are likely to be the first victims in an economic downturn, said Michelle Cheong, director and global product development lead for credit solutions data at S&P Global Market Intelligence.

That group is “very much a hidden, under the radar” segment, Cheong told CNBC in a phone call on Monday. That’s because unrated borrowers are much smaller in size collectively: Their total assets have consistently been less than 10% of their rated peers’ over the last five years.

“The unrated entities are like the canary in the mine. They are the ones that usually start to default first — before you see trouble happening among the rated entities — because they are the weaker link,” she added.

Total assets by rated and unrated entities in FY 2018

Source: S&P Global Market Intelligence (June 28, 2019)

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