SP Global - Industry Top Trends Midyear 2023 - 230904 - 072620

Industry Top Trends
Midyear 2023
At A Crossroad
July 27, 2023
This report does not constitute a rating action

Contacts
Gareth Williams
London
Head of Corporate Credit Research
+44-20-7176-7226
gareth.williams@spglobal.com
Gregg Lemos-Stein
New York
Chief Analytical Officer,
Corporate Ratings
+1-212-438-1809
gregg.lemos-stein@spglobal.com
Yucheng Zheng
New York
yucheng.zheng@spglobal.com
Gregoire Rycx
Paris
gregoire.rycx@spglobal.com
Industry Top Trends Update Midyear 2023: At A Crossroad
Contents
Industry Top Trends Midyear 2023: Key Themes ............................................................................................................................................. 4
North America
Aerospace and Defense | Robust demand amid choppy supply .................................................................................................................... 8
Autos | Look before you leap ............................................................................................................................................................................. 9
Building Materials | Higher rates and lower spending to pressure ratings ................................................................................................... 10
Capital Goods | U.S. manufacturers ride a wave of late-cycle demand ......................................................................................................... 11
Chemicals | Credit outlook dims following weak demand recovery .............................................................................................................. 12
Consumer Products | Less volatile demand and easing cost pressure in sight ........................................................................................... 13
Health Care | Demand is steady, margins and cash flows are not ................................................................................................................ 14
Homebuilders and developers | More normalized conditions are finally under construction .................................................................... 15
Hotels, Gaming, and Leisure | Even if there's no recession, the leisure surge will slow .............................................................................. 16
Media and Entertainment | Secular challenges magnified by an advertising recession ............................................................................. 17
Metals and Mining | Unique, scarce assets defend credit quality ................................................................................................................. 18
Midstream Energy | Solid credit quality amid a shifting landscape .............................................................................................................. 19
Oil and Gas | Cash flow builds resilience, but challenges abound ................................................................................................................ 20
Real Estate | Higher-for-longer interest rates are a headwind...................................................................................................................... 21
Regulated Utilities | Credit quality should stabilize ........................................................................................................................................22
Retail and Restaurants | Value reigns as consumers grow increasingly cautious ...................................................................................... 23
Technology | Elevated rates most detrimental to speculative-grade issuers ............................................................................................. 24
Telecommunications | Credit risk increasing due to competition and higher rates ................................................................................... 25
Transportation Infrastructure | Mobility grows despite affordability risks ................................................................................................. 26
Transportation | Strong air travel demand but slowing freight .....................................................................................................................27
Unregulated Power | Energy transition: The only thing constant is change ................................................................................................ 28
Europe
Aerospace and Defense | It’s all about the supply chain .............................................................................................................................. 29
Autos | Heading toward a moderate slowdown ............................................................................................................................................. 30
Building Materials | Stable credit quality, with some weakness in the 'B' category .................................................................................... 31
Capital Goods | Secular tailwinds provide support in challenging environment ......................................................................................... 32
Chemicals | Sluggish demand and still-high costs pressure credit quality ................................................................................................. 33
Consumer Products | Price increases will moderate amid tepid consumer demand ................................................................................. 34
Health Care | Ongoing growth for pharma, challenges for services ............................................................................................................. 35
Homebuilders and Developers | Declining demand will dent developers’ margins .................................................................................... 36
Hotels, Gaming, and Leisure | European leisure demand continues, for now ............................................................................................. 37
Media and Entertainment | Holding up to technological and macroeconomic disruption ........................................................................ 38
spglobal.com/ratings July 27, 2023 2

Metals and Mining | Balance sheets are supportive, but cost curves are shifting ..................................................................................... 39
Oil and Gas | Cash flow builds resilience, but challenges abound ................................................................................................................ 40
Real Estate (REITs) | Refinancing risks increase, asset corrections materialize ......................................................................................... 41
Retail and Restaurants | Consumer cutbacks will test retailers’ resilience ................................................................................................ 42
Telecommunications | Solid outlook, but caution on structural M&A changes .......................................................................................... 43
Transportation Infrastructure | Rising financing costs and inflation test ratings' resilience .................................................................... 44
Transportation | Air travel recovers, container freight rates plunge............................................................................................................ 45
Utilities | Electricity and gas continue to flow, but at a price ....................................................................................................................... 46
Asia-Pacific
Autos | Demand uncertainty and pricing pressure to persist ........................................................................................................................47
Building Materials | Asia-Pacific producers brace for market volatility ....................................................................................................... 48

Capital Goods | Demand and cash flow outlook mixed ................................................................................................................................. 49
Chemicals | The demand boost from China's reopening could disappoint ................................................................................................. 50
Consumer Products | Modest recovery in performance ahead ..................................................................................................................... 51
Gaming | Better prospects of a revenue recovery across the region ........................................................................................................... 52
Media And Entertainment | China's social media platforms could benefit from winter thaw ................................................................... 53
Metals and Mining | China demand recovery remains soft and gradual ...................................................................................................... 54
Oil and Gas | Supportive hydrocarbon prices to continue in 2023 ............................................................................................................... 55
Real Estate Development | Sales divergence between upper and lower-tier cities in China .................................................................... 56
Real Estate Investment Trusts | Pressure rising for office segment, but most REITs can manage ...........................................................57
Retail | Retailers' focus turns to cost efficiencies as sales moderate ......................................................................................................... 58
Technology | Outlooks are turning more negative before cyclical trough ................................................................................................... 59
Telecommunications | Telcos invest for growth ............................................................................................................................................ 60
Transportation Cyclical | Diverging recovery in face of high costs ................................................................................................................ 61
Transportation Infrastructure | Rising interest rates and cost of living restrain demand uplift ............................................................... 62
Utilities | New investments, leverage, and interest rates remain key .......................................................................................................... 63

Industry Top Trends Midyear 2023: Key Themes

Key Takeaways
• Our midyear updates point to a nonfinancial corporate sector at a crossroad. Easing
cost pressures and resilient economies have sustained financial performance but
higher-for-longer interest rates could pose serious difficulties for weaker credits.
• Operating performance: Demand has softened, but not slumped, and pandemic
recovery momentum lingers for some sectors. Falling energy, freight, and commodity
prices have eased cost pressures, but labor costs are now top of mind.
• Financial performance: Refinancing risk for leveraged companies remains high,
particularly for sectors with a high proportion of weaker credits. Free cash flow
pressure and dwindling interest cover are key concerns.
• Other trends: Regulations and legislation are having a profound effect, with energy
transition efforts are elevating capital expenditure needs. Defense spending is seeing a
sustained increase. The credit implications of AI are still unknown.
What's changed, what matters, what are the risks?

S&P Global Ratings analysts have published 56 midyear Industry Top Trends updates for Asia-
Pacific, Europe, and North America. These one-page updates summarize our evolving views,
focusing on what’s changed, what to look out for, and what are key risks to our baseline
scenarios. They are drawn from our assessments of around 5,000 rated corporate and
infrastructure entities. All individual Industry Top Trends reports can be accessed here. For
updates on Latin America, please see "Latin American Corporate And Infrastructure Midyear
Credit Outlook 2023: Market Ice Cracks, Yet A Chill Remains, July 6, 2023".
The big picture - themes and risks

Corporate sectors are faring better than feared this year. In our base-case scenario, a relatively
shallow economic downturn points to profit growth hitting a standstill, but not falling into a
slump. The course of inflation and interest rates will still be most consequential drivers of credit
risk in the months ahead. If inflation pressures prove sticky, higher-for-longer interest rates and a
squeeze on free cash flow could yet bring serious difficulties for weaker credits, particularly
those rated 'B' or below. Free cash flow is under pressure and interest cover dwindling.
Refinancing remains challenging and costly, and interest costs are starting to bite as cheaper
pandemic-era funds are rolled over.
The reports that follow point to a corporate sector still caught in many crosscurrents. The
aftershocks of the pandemic continue to be felt in pent-up demand, supply chain pressures,
inventory cycles, and changes in working patterns. The war in Europe has had a dramatic effect
on energy and commodity prices, and their decline has been essential in avoiding a more difficult
year so far. Labor costs are replacing nonlabor costs as a source of worry and margin risk. And
more structurally, the energy transition and environmental regulations are having a profound
effect on capital expenditure plans.
Operating performance
Demand has softened, but not slumped, as momentum in the post-pandemic recovery lingers.
A recession has not yet materialized in most countries, notably the U.S., and most sectors report

resilient demand. There are regional and sector variations, with more signs of softening demand
in Europe and Asia-Pacific than North America, and greater strength in services than goods.
• China's demand recovery is soft and gradual: non-export light vehicle sales fell 2.5% in
January to April, lagging our full-year assumption of 1% growth, and new construction activity
is weak, hampered by what we expect to be an L-shaped recovery for the property sector.
• In Europe, retail sales volumes are declining or stagnant, and we anticipate mid- to high-
single-digit volume declines in residential construction in 2023-2024.
• In North America, there are some areas of pressure: advertising remains in recession,
chemical demand is weaker than expected, and we revised our information technology
spending forecast for 2023 to 2.2% in June, from 3.3% in January.
But taken as a whole, the better-than-expected macroeconomic environment has been

supportive for revenues and prospects for 2024 are supported by our baseline assumption of a
shallow downturn. Moreover, some sectors continue to benefit strongly from post-pandemic
pent-up demand, notably aerospace, airlines, autos, and leisure, although this impetus is fading.
Despite all this apparent resilience, overall demand growth is slowing, cost-of-living pressures
acute for many consumers, and risks remain firmly to the downside.
The focus on cost inflation has shifted to labor. The fall in energy, commodity, and other costs
such as freight and shipping has taken the sting out of nonlabor cost inflation, even if the
absolute level of many costs remains higher than pre-pandemic levels. There is now greater
concern around labor costs, particularly at a time when unemployment remains historically low
and with wages the predominant cost for many industries. Labor shortages are affecting labor-
intensive sectors such as retail and health care services, and skilled labor scarcity is flagged by
aerospace and defense, autos, capital goods, homebuilders, and transportation. Even where
shortages are not the primary issue, labor costs are a concern for many sectors. In European
telecoms, we estimate that every 5% increase in labor costs will cut EBITDA margins by 1%.
We expect margins to decline as pass through becomes more difficult. Falling nonlabor costs
and successfully passing through higher input costs have helped keep profit margins elevated
despite a widespread expectation of margin declines. This resilience is unlikely to persist, with
many sectors anticipating a margin decline as customers resist further price increases and labor
costs squeeze profitability. For instance, for Asia-Pacific autos, margins will likely be weaker than
we had anticipated, and for the European leisure sector, wage inflation is hurting EBITDA
margins. For U.S. technology, below-trend demand, excess inventory, and IT budget constraints
are an unfavorable combination that will likely compress margins. The story for margins is not
likely to be one of uniform decline, however. In our view, European capital goods companies with
strong market positions can defend or even expand their margins, as long as underlying demand
remains healthy. We expect U.S. consumer product company margins to improve as cost inflation
eases. Nevertheless, the broader direction of travel is for-profit margins will continue to turn
lower.
Supply chain strains have abated for most, but not all, sectors. Some sectors that were hardest
hit by supply chain issues are seeing improvement. Easing supply-chain constraints are apparent
in sectors such as autos, capital goods, consumer products, and transportation infrastructure.
However, there are still ongoing pressures for some industries. For aerospace and defense,
forgings, castings, and the availability of some raw materials remain sources of bottlenecks and
in capital goods some electronic chips are still scarce. Australian building materials producers
could also face raw material shortages due to a supply-chain bottleneck caused by extreme
weather. Supply chain issues still frequently cited as a risk, particularly in the broader geopolitical

context. Global tech firms are diversifying their supply chains away from China to manage
geopolitical, policy, and concentration risk, which is likely cost inflationary.
Excess inventory is a concern for some sectors. Supply-chain strains and demand surges have
forced rapid accumulation of inventory in some industries. At a time when demand is slowing and
recession risks high, this inventory build and associated expansion of working capital poses
credit risk. Many nonfood retailers in segments such as DIY, household goods, and apparel still
have elevated inventories due to a combination of advance orders and weaker volumes. Cash
flows and credit metrics will, to a large extent, depend on the ability of these retailers to convert
the excess stock to cash, without significant promotions or discounting. In the technology, sector
inventory correction could take time given falling demand.
Financial performance
Refinancing risk for leveraged companies remains high. Heightened refinancing risks are a
concern across many industries, particularly those with a higher share of weaker credits. A
difficult combination of rising interest rates, tightening credit standards, and weakening demand
poses considerable risks for weaker speculative-grade issuers that often rely on floating-rate
debt. Our European building materials team note that current prevailing interest rates of 8.5%-
9.5% for refinancing transactions in the 'B' category mean an average increase of about 300
basis points compared with 2021, when debt was priced at historically low levels. Pandemic-
related demand shifts are complicating matters too. Rated U.S. REITs face about $14 billion of
debt maturing in 2023 and $23 billion coming due in 2024, at a time when demand for office
space has fallen considerably. The prospect of higher-for-longer interest rates is of widespread
concern, given that this could strain free cash flows for weaker issuers and add to the difficulties
in refinancing.
Free cash flow pressure and interest cover are more pressing than leverage. The impact of
higher interest rates is starting to be felt in cash interest payments, which are increasing rapidly.
Allied to ebbing demand, this implies pressure on free operating cash flow and measures of
interest cover may be more revealing of credit risk than leverage measures. For instance, about
50 'B' category credits in U.S. capital goods face higher financing costs and rely on stronger
earnings and cash flow in 2023 to refinance 2024 and 2025 maturities. This cohort of mostly
leveraged buyouts (LBOs) generated about 80% less free cash flow than we expected in 2022. A
prolonged period of higher-for-longer rates could exacerbate these cash flow pressures.
Some companies are lowering leverage targets. In the U.S. consumer products sectors, several
'BBB' category issuers have lowered their long-term leverage targets due to higher interest rates
and lessons learned from the volatile operating environment. In European capital goods, we note
that some companies now have a more conservative balance sheet, particularly following higher
M&A activity, to support their credit standing, given the higher cost of debt. This may become a
wider consideration if the upturn in inflation proves persistent and brings about a more
permanent adjustment in the cost of debt.
Mergers and acquisitions (M&A) are on the backburner but a concern for some. Given a
backdrop of rising interest rates, weakening demand, and refinancing challenges, M&A is not a
widespread consideration. Areas where M&A activity may increase include aerospace and
defense, health care, media and entertainment, and metals and mining. Regulatory decisions will
also shape M&A prospects, for instance in European telecoms.
The energy transition is elevating capital expenditure (capex) needs. In areas where capex
cycles have traditionally been intensive and prone to credit risk - oil, gas, metals, and mining, for
example - we continue to see a close focus on capital discipline. However, the energy transition is

bringing a new dimension that is creating a higher base of capex across many industries. This
implies both significant risks and returns. For instance, it implies massive investment to supply
critical metals, and similarly for power generators and networks. Higher capital expenditure is
also needed to meet carbon-dioxide-reduction goals. Airlines, cement manufacturers,
petrochemicals, and fertilizers in particular, face tightening environmental regulations in Europe,
increasing carbon dioxide costs, and unavoidable investments to transition operations to lower
carbon-dioxide intensity.
Other trends
Regulatory interventions are having a significant impact. Policymakers and regulatory
authorities continue to shape the operating landscape for the corporate sector, in some cases
profoundly. In the U.S., the Inflation Reduction Act, The Infrastructure Investment and Jobs Act,
proposed Clean Air Act emissions limits, and The Broadband Equity, Access, and Deployment
(BEAD) Program are all mentioned in our Industry Top Trends reports as likely to have significant
implications in the year ahead. In Europe, Fit for 55, the EU's decarbonization roadmap, is proving
consequential, and China's regulatory changes and pressures related to gambling could cause
volatility in gaming revenue and profitability. State intervention is not new, but it appears
particularly consequential at present, especially in terms of the energy transition and
environmental regulations.
Higher defense spending will likely persist. The ongoing war in Ukraine and heightened tensions
between the U.S. and China seem likely to bring a sustained upturn in defense spending. A 3.2%
increase in U.S. defense spending has been requested for 2024, following the 10% year-over-year
increase in 2023. Certain sectors already considered key (missile defense, hypersonics, space,
cyber) will likely reap a higher share of this. In Europe, the war has spiked demand for products
like battlefield radar, unmanned aerial vehicles, and munitions. Rising defense budgets are
enabling the European issuers that we rate to win some large contracts.
We're still in the early days for credit considerations of artificial intelligence (AI). While the
long-term implications may be profound, near-term credit implications appear modest. In media,
it is still too early to tell how AI will reshape the sector. It will require hefty investments to develop
and acquire technology, so smaller players that don’t already own it or that lack capacity for M&A
could miss out. Over the long term, AI could enhance efficiency and reduce costs, for example, in
content creation and editing. Still, wider implications for the industry, including the regulation
and evolution of copyright, remain highly uncertain.
Chinese electric vehicles (EVs) may shake up the auto market. The appeal of Chinese EVs in
Europe exceeds expectations, even in brand-loyal markets. Chinese OEMs capitalize on their
agile cost structures and reliable supply chains to penetrate markets where consumers can take
advantage of subsidies irrespective of where the EVs were produced. Chinese OEMs have no
interest in a price war, but if they decide to chase market share, this could make it harder for
incumbents to achieve their profitability targets.
Related Research
• Global Refinancing--Progress Made As Pressure Remains, July 25, 2023
• Global nonfinancial corporates: Interest-rate costs start to bite, June 1, 2023
• Corporate Results Roundup Q1 2023: Beating Expectations, But EBITDA In Recession, May 24, 2023
• U.S. Inflation Reduction Act Highlights Diverging Approaches With Europe, March 1, 2023

Industry Top Trends Update | North America
Aerospace and Defense Jarrett Bilous

Toronto
jarrett.bilous@
spglobal.com
Robust demand amid choppy supply +1 416 507 2593
What’s changed? Rating Trends

Commercial aerospace orders continue to expand. Demand for new passenger aircraft Outlook Distribution
has strengthened as customers seek to capitalize on the post-pandemic travel recovery Negative Stable Positive
and aim to reduce emissions and fuel costs. Backlogs have extended well into the next All
decade, and widebody aircraft orders have recently accelerated as long-haul 27% 62% 11%
Investment Grade
international travel returns. The after-market parts sales/maintenance services outlook is
30% 70%
favorable on the strength of this recovery and buoyed by the return to service of older Speculative Grade
aircraft, though it is somewhat hampered by limited capacity and labor availability. 26% 60% 14%
Supply constraints continue but there are glimmers of hope. Many commercial 0% 50% 100%
aerospace suppliers still operate below capacity due to labor shortages and procurement
issues (namely component suppliers). However, recent operational disruptions--
impacting the Boeing MAX and 787 family of aircraft in particular--have not affected the Ratings Statistics (YTD)*
company's delivery targets, in contrast to past disruptions.
IG SG All
Higher U.S. defense spending forthcoming. A 3.2% increase in U.S. defense spending has Ratings 10 35 45
been requested for 2024, following the 10% year-over-year increase in 2023. Certain
Downgrades 0 3 3
sectors already considered key (missile defense, hypersonics, space, cyber) will likely
reap a higher share of this. Upgrades 1 2 3
Ratings data as of end-Jun 2023. * Year-to-
date. Current ratings only.
What to look out for?
Will aircraft delivery targets be revised? Boeing intends to increase its MAX production Ratings Outlook Net Bias
to 38 per month and its 787 production to five per month by the end of this year, and we
Net Outlook Bias (%) Aerospace & Defense
anticipate an update on the status of these targets post-Q2 2023 earnings. In addition, we 0
expect a regulatory ruling on Boeing's MAX-7 aircraft this year and await a potential -10
-20
return of MAX deliveries to China. -30
-40
When will supply chain issues get resolved? Shortages of skilled labor and components
-50
-60
persist, but we anticipate capacity constraints will gradually ease and lead to higher 2015 2016 2017 2018 2019 2020 2021 2022 2023
volumes and efficiencies next year.
U.S. tax rule changes. Defense issuers are facing temporarily higher cash costs due to
Related Research
the U.S. tax rule implemented in 2022 that requires capitalization of R&D spending.
However, this rule could be amended or deferred in future legislation. Huntington Ingalls Industries Inc. Ratings
Affirmed On Improving Credit Measures,
Outlook Stable, June 2, 2023
What are the key risks around the baseline? Boeing Co.'s Affirmation Of Its Previous
Guidance Suggests The Risks From Its
Manufacturing Flaw Will Be Limited, April 27,
Labor shortages and operational challenges. The U.S. unemployment rate is at a multi- 2023
decade low and wage growth is relatively high. A limited supply of skilled labor amid
ongoing supply chain issues could impair operational execution, result in sustainably
higher costs, and impede the earnings recovery for commercial aerospace companies.
Heightened share repurchases. Certain higher-rated defense companies remain active

with share repurchases, and future cash outflows for shareholder-friendly initiatives
could delay (or derail) projected credit measure improvement.
Future declines in defense spending. Political pressure to contain budget deficits,

alongside potential waning support for Ukraine, may result in moderating spending.

Autos Nishit Madlani

New York
nishit.madlani@
Look before you leap spglobal.com

+1 212 438 4070

Strong start could result in slow finish. While improving supply chain and pent-up Outlook Distribution
demand supported stronger-than-expected auto sales in the U.S. for the first half of Negative Stable Positive
2023, we expect the momentum to brake modestly for the second half and a flattish sales All
environment in 2024. 28% 61% 11%
Investment Grade
Earnings should remain steady. Production discipline will likely minimize the need for 89% 11%
sales incentives, and the combination of lower commodity costs, higher volumes, and Speculative Grade
37% 52% 11%
steady product mix will still support modest year-over-year improvement in profits for
most U.S. auto issuers. 0% 50% 100%
Momentum for electric and plug-in hybrid vehicles will intensify. With subsidies from
the Inflation Reduction Act (IRA), investments in local supply chains, and anticipated price
Ratings Statistics (YTD)*
cuts, we expect significant launches at lower prices through 2025. Our estimate for the
combined market share for electric vehicles (EVs) and plug-in hybrids to be around 10% IG SG All
for 2023 and above 20% by 2025, has more upside than downside. Ratings 9 27 36
Downgrades 0 2 2
What to look out for? Upgrades 1 3 4
Automakers need to look before they leap: To reduce pressure on margins and cash Ratings data as of end-Jun 2023. * Year-to-
flows from higher incentives, lower price, and demand volatility, automakers will have to
remain very cautious as they rebuild inventories towards their targets.
Ratings Outlook Net Bias
Residual supply chain, labor availability shocks. The industry could experience volatility
stemming from residual supply chain bottlenecks for analog chips, disruptions from Tier Net Outlook Bias (%)
20
Autos
2/Tier 3 suppliers, and potential labor availability issues to meet their production targets. 0
-20
-40
Ratings downside more likely for weaker-rated suppliers. Lower-rated auto suppliers -60
continue to struggle to pass on higher costs, and we expect these suppliers could also -80
-100
face greater problems refinancing their debt at higher rates as maturities come due. 2015 2016 2017 2018 2019 2020 2021 2022 2023
What are the key risks around the baseline? Related Research
Sustained drop in demand due to affordability concerns. A sharp and persistent
Economic Outlook U.S. Q3 2023: A Sticky
increase in unemployment above our base-case, amid persistent inflation and rising Slowdown Means Higher For Longer,
borrowing costs, could stress lower-income households and even squeeze higher-income June 26, 2023
consumers, hence hurting product mix for automakers. Global Auto Sales Forecasts: Macro Risks
Demand Pricing And Production Discipline,
Sharp used car prices declines may signal further weakness. If consumer confidence April 18, 2023
Industry Risks And The Effect Of EBITDA
weakens and used car prices decline significantly in the second half, it will also weaken
Stress On Aftermarket Auto Suppliers, April
new vehicle prices (which tend to be correlated to used prices) beyond our base-case 20, 2023
decline of around 5%-7%, and reduce earnings across the auto industry. Despite Higher Volumes, U.S. Auto Sector
Ratings Upside Remains Limited Due To
Cannibalization of high-margin segments. A higher-than-expected adoption rate for EVs Macro Uncertainty, Pricing Pressure, And
High Interest Rates, April 24, 2023
would likely dampen profitability and cash flow in 2023-2025, especially if it cannibalizes
the market share of their legacy high-margin internal combustion engine trucks.

Building Materials Ana Lai, CFA

New York
Ana.lai@
Higher rates and lower spending to pressure ratings spglobal.com

+1 212 438 6895

Weaker fundamentals and high inflation. High interest rates coupled with persistent Outlook Distribution
inflation are pressuring spending on renovations and remodeling, while creating Negative Stable Positive
affordability concerns for new construction. Despite weakness in the residential end All
market, existing backlogs will likely support nonresidential construction spending, limiting 5% 92% 3%
Investment Grade
revenue declines. Infrastructure related spending could also provide some incremental
8% 92%
volumes beginning in the second half of 2023 and increasing in 2024, although the timing Speculative Grade
and magnitude could be subject to macroeconomic conditions. Increased competition to 4% 93% 4%
capture volumes limits pricing power, which, combined with worsened fixed cost
0% 50% 100%
absorptions, will likely pressure margins. Companies that focus on nondiscretionary
products, such as roofing or HVAC, should be more resilient than manufacturers of more
discretionary products, such as kitchen cabinetry and bath wares.
Free cash generation remains adequate. Deflating commodity costs, normalized lead
IG SG All
times, and slower pace of backlog creations are resulting in lower working capital
outflows and cash inflows for some issuers. This along with modest capital expenditure Ratings 12 54 66
needs still support relatively healthy free cash flow despite lower earnings. Downgrades 1 2 3
Growing ratings pressure. We see potential for more negative rating actions based on Upgrades 0 1 1
slowing operating fundamentals and lower ability to manage inflationary pressures. Given Ratings data as of end-June 2023. * Year-
to-date
the concentration of private equity ownership, more-aggressive acquisitions or
shareholder returns could drive more downgrades, particularly at the lower-rated credits.
What to look out for? Net Outlook Bias (%)

20
Building Materials
10
Elevated costs add further pressure on margins. Building materials companies have 0
-10
already experienced declining margins due to higher costs such as commodities, labor, -20
-30
and freight. We expect these costs to remain elevated and to further pressure margins if -40
-50
the ability to pass through the cost increases is more limited. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Rising rates pressure the ability to service floating rate debt. We expect a higher
interest burden from exposure to floating-rate debt to pressure interest coverage metrics
given limited hedging protection. Currently nine building materials companies are rated
Related Research
'B-' (15% of the portfolio) and face increasing downside risk given weaker operating Real Estate Monitor: Tightening Access To
results and highly leveraged capital structures. Capital Heightens Refinancing Risk, June 5,
2023
Rating Pressure Grows For Building
What are the key risks around the baseline? Materials Issuers Rated 'B-', May 11, 2023
Slower growth in new construction and more pullback in remodel spending. While we
believe home buyers are adjusting to higher mortgage rates and demand for new homes
appears resilient so far, the impact of a "higher for longer" rate environment is yet to be
seen. A sharper-than-expected pullback in homebuilding or renovation demand could
pressure issuers more exposed in these segments.
Weaker ability to pass on cost increases. Slowing demand for home repairs and
construction amid persistent cost pressure would likely limit pricing power and pressure
margins. Unfavorable price-cost mixes, sticky inflation of commodities, labor, and delivery
costs could result in weaker-than-expected margins and cash flows.

Capital Goods Don Marleau, CFA

Toronto
donald.marleau@
U.S. manufacturers ride a wave of late-cycle demand spglobal.com

+1 416 507 2526

Purchasing managers' index (PMI) drops as backlogs convert. End-market activity has Outlook Distribution
been solid, albeit with some destocking as large backlogs moderate. The J.P. Morgan Negative Stable Positive
Global PMI Composite Output Index, produced by S&P Global, shows that new orders fell All
globally for a twelfth consecutive month in June and at the sharpest rate since January. 18% 76% 6%
Investment Grade
Services are growing, boosting high-margin revenues from the aftermarket and for
11% 86% 3%
diversified companies offering industrial automation and digitalization services. Speculative Grade
21% 71% 7%
Costs drop, supply chains ease, and profits hold. Prices for most commodities are lower
in 2023 but remain historically high. Supply chains are more predictable and commitment 0% 50% 100%
rates from suppliers are improving. Labor could be a hurdle to profitable growth, with
rising wages amid scarce skilled labor. Total employees in U.S. manufacturing returned to
2019 levels of about 12.9 million in 2021, but this is still lower than the 14 million prior to the Ratings Statistics (YTD)*
financial crisis in 2008 and 17 million before the 2001 recession.
IG SG All
Credit strains emerge for low-rated companies. Our negative outlook bias is almost 20% Ratings 36 84 120
for 'B' category credits, in contrast with good industry conditions. About 50 'B' category
Downgrades 1 6 7
credits in U.S. capital goods face higher financing costs and rely on stronger earnings and
cash flow in 2023 to refinance 2024 and 2025 maturities. This cohort of mostly leveraged Upgrades 1 2 3
buyouts (LBOs) generated about 80% less free cash flow than we expected in 2022. Ratings data as of end-Jun 2023. * Year-to-
What to look out for? Ratings Outlook Net Bias

A drop in orders if interest rates chill demand. Our economists forecast flat real Net Outlook Bias (%) Capital Goods
equipment investment in 2023 and moderating inflation, which could slow organic 0
-10
revenue growth to low-single digits from high-single digits in the last two years. -20
-30
Slowing price growth flows through to 2023 margins. The producer price index (PPI) is a
-40
-50
good indicator of pricing power and margins, and it spiked from mid-2020 to mid-2022. -60
2015 2016 2017 2018 2019 2020 2021 2022 2023
Producer prices increased more in those two years than the decade prior, but the index
has been modestly negative for almost a year now. These companies generated good
pricing and margins through record cost increases. Now, customers are looking for some
relief as costs drop and supply constraints ease. Related Research
Tailwinds for U.S. manufacturing. Spending on strategic priorities like manufacturing
Heavy Lift: U.S. Capital Goods Companies
security, energy transition, and infrastructure provides a baseload of demand for Leverage A Big Backlog To Defend Credit In
commodities and capital items to augment cyclical corporate capital expenditures. 2023, Feb. 03, 2023
United Rentals Inc., April 10, 2023
Parker-Hannifin Corp., May 31, 2023
What are the key risks around the baseline? Georgia-Pacific LLC, July 11, 2023
U.S. capital goods tends be a late-cycle, interest-sensitive sector. Economic

performance has been stronger than expected in 2023, and U.S. capital goods has been a
big part of that. That said, higher interest rates are aimed at slowing demand, with strains
evident for consumers, and less so for operating expenditure and capex so far.
A profit or cash flow slump would hit low-rated issuers hard. We stress-tested the U.S.
capital goods portfolio for a potential cyclical downturn, and most issuers rated 'BB' and
above show generally good ratio buffers. By comparison, the lower rungs of credit quality
in the 'B' category rely on stronger profits and cash flow in 2023 to support a growing
maturity wall in 2024 and 2025.

Chemicals Paul Kurias

New York
paul.kurias@
Credit outlook dims following weak demand recovery spglobal.com

+1 212 438 3486

Slower-than-anticipated demand rebound. Demand recovery from an inventory Outlook Distribution
destocking-related slowdown has been weaker than we anticipated for several chemicals. Negative Stable Positive
All
Slightly improved economic fundamentals. We think the risks of a reversal of the 16% 74% 10%
recovery (or of a demand shock) are now slightly lower than they were in January. We Investment Grade
expect U.S. GDP growth to be marginally positive versus previous expectations for slightly 13% 74% 13%
negative growth. Speculative Grade
17% 74% 9%
Capital market tightness. Lower accessibility to capital markets especially for lower
0% 50% 100%
rated companies raising refinancing risks.
What to look out for? Ratings Statistics (YTD)*
Pricing pressure. If demand doesn’t recover sufficiently or in a timely manner, commodity IG SG All
chemicals could see further pricing pressure. Ratings 23 46 69
Rising interest costs. The full impact of higher rates will play out in 2023 and beyond. Downgrades 0 3 3
Distressed exchanges. Challenging capital markets and lower debt trading levels could Upgrades 0 1 1
result in a higher level of debt exchange offers. At lower rated credits, we might consider Ratings data as of end-Jun 2023. * Year-to-
such offers as distressed exchanges under certain conditions.

What are the key risks around the baseline?
Net Outlook Bias (%) Chemicals
20
Earnings weakness. Earnings could be weaker than we anticipate if demand doesn’t 10
0
improve as expected in the second half of the year. -10
-20
-30
Financial policy that is not adapted to more challenging conditions. Leverage could be -40
-50
higher than anticipated if companies pursue debt funded mergers and acquisitions or
-60
2015 2016 2017 2018 2019 2020 2021 2022 2023
shareholder rewards without fully considering changed operating and financing

conditions.
Liquidity constraints. Lower operating cash flow, and unfavorable capital market Related Research
conditions could strain liquidity especially at lower rated credits.
Credit FAQ: Our Views On Celanese Corp.'s
Credit Quality Following Release Of Its
Fourth-Quarter Results, March 6, 2023
Global Chemical Companies--Strongest To
Weakest, Feb. 15, 2023
Industry Top Trends 2023: Chemicals, Jan.
23, 2023

Consumer Products Sarah Wyeth

New York
sarah.wyeth@
Less volatile demand and easing cost pressure in sight spglobal.com

+1 212 438 5658

Consumer behaviors are gradually normalizing. With more predictable demand patterns Outlook Distribution
returning--albeit at low levels in some categories--replenishment orders from retailers Negative Stable Positive
will also be more predictable, enabling companies to right-size their inventories. Service All
levels for many consumer packaged goods are back in the 90% area. We expect a return 36% 60% 4%
Investment Grade
to typical growth rates in the low-single-digit percent area for most staples, driven largely
23% 71% 6%
by price. Consumers' increasing price elasticity will continue to pressure volumes. Speculative Grade
42% 55% 3%
We expect margins to improve as cost inflation eases. Freight, transportation, shipping,
and energy costs have all come down from peaks. Most costs have been passed forward 0% 50% 100%
with price increases. Although labor costs remain high, the rate of increase has slowed
and we expect margin recovery in the second half of the year. However, companies in
discretionary categories such as apparel and durables need to promote given price- Ratings Statistics (YTD)*
sensitive consumers, which will pressure profits.
IG SG All
Companies are adapting to higher interest rates. Several 'BBB' category issuers have Ratings 48 120 168
lowered their long-term leverage targets due to higher interest rates and lessons learned
Downgrades 2 24 26
from the volatile operating environment. Lower leverage targets provide a buffer and
protect shareholder returns. Upgrades 3 10 13

Nimble supply chains are better positioned to absorb disruptions. We expect Ratings Outlook Net Bias
investments in digitizing and automating supply chains, and efforts to on- or near-shore
suppliers to reduce labor costs and soften the blow of future shocks. Net Outlook Bias (%)
0
Consumer Products
-10
Record margins in the protein sector have come to an end. While the margin contraction -20
-30
is unprecedented, so was the boom cycle prior to the downturn, during which issuers -40
maintained prudent financial policies and diversified operations. Therefore, the ratings -50
-60
impact of this cycle--while still negative--is less likely to be as severe as the cycle in 2012. 2015 2016 2017 2018 2019 2020 2021 2022 2023

Related Research
Consumers pull back spending more than expected. The state of the consumer
continues to be the biggest wild card in the economic outlook. Slowing inflation bodes A Cocktail Of Growth And Financial
Discipline Will Keep Most Alcoholic
well because the Fed may not need to inflict significant damage to the jobs market, one
Beverage Sector Ratings Steady, June 21,
of the last pillars supporting consumers, to cool the economy. If the U.S. can't pull off the 2023
soft landing, there could be more pain in store for consumer-facing sectors. 2023 CAGNY Presentations Highlight The
Long Road To Recovery For Consumer
Rates stay higher for longer, straining cash flows of issuers with the weakest credit Products Companies, March 15, 2023
measures. If, instead, the Fed keeps rates higher for longer than expected, issuers with Why One In Four U.S. Consumer Products
‘BBB’ Category Issuers Have Lowered
thin cash flows could be challenged to refinance, which would likely increase the already Leverage Targets Significantly, February 16,
high number (51 or about one-third of the portfolio as of May 1, 2023) of credits rated 'B-' 2023
Our Stress Test To Protein Processors'
and lower.
Margins May Not Cut Into Ratings, But The
Sector's Lean Leverage Could Fatten,
Large debt-funded acquisitions. We expect merger and acquisition (M&A) activity to February 2, 2023
remain limited to portfolio optimization that accelerates growth. As companies, especially
in the acquisitive food and beverage space, gain confidence in the economic outlook,
larger debt-funded acquisitions could return. If we believe an issuer's M&A activity signals
a change in financial policy, we could reassess our view of its credit quality.

Health Care Arthur Wong

Toronto
arthur.wong@
Demand is steady, margins and cash flows are not spglobal.com

+1 416 507 2561

Demand solid, acuity normalizing. We expect health care spending to return to steady Outlook Distribution
annual 5%-6% increases, with acuity to return to pre-pandemic levels, in early 2024. We Negative Stable Positive
expect demand to remain steady despite economic uncertainty. All
25% 68% 7%
Overall ratings outlook stable, but health care services negative. More labor-sensitive, Investment Grade
lower-margin health care service providers have been hurt by higher labor and material 10% 84% 7%
costs as well as higher interest expense that have sapped cash flows. The large subsector Speculative Grade
30% 64% 7%
has and will likely continue to bear the brunt of negative rating actions in the sector.
0% 50% 100%
Pharma and med devices solid. Big Pharma and major medical device makers'
performance is projected to be solid. Despite biosimilar penetration and declining COVID-
19-related sales, new product approvals and returning higher-acuity procedures support
sales and earnings in the next year 18 months.
IG SG All
Ratings 31 108 139
Reimbursement and margin pressures. With the return of higher utilization, payors are
Downgrades 0 12 12
refocusing on costs, which could mean tougher reimbursement rate negotiations. Can
companies obtain reimbursement rates high enough to offset persistent elevated labor Upgrades 0 6 6
and material costs? Ratings data as of end-Jun 2023. * Year-to-
Liquidity, ability to refinance and conduct M&A. Speculative-grade health care's free
cash flows have been hurt by EBITDA margin pressures and heightened interest expense. Ratings Outlook Net Bias
While liquidity may be adequate for most companies for 2023-24, maturities in 2025-26
loom. Also, an inability to conduct strategic M&A may have negative ramifications from a Net Outlook Bias (%)
0
Health Care
competitive position standpoint. -10

-20
Legislative risk elevated. With the No Surprises Act and Medicaid redeterminations -30
-40
affecting the industry, the looming impact of the Inflation Reduction Act (Medicare drug -50
price negotiation) in the U.S., and EU pharmaceutical industry reform still unclear, the 2015 2016 2017 2018 2019 2020 2021 2022 2023
health care industry is seeing higher risk on the legislative front.
Revenue and margin shortfalls. With elevated labor costs, staffing shortage-related
Tear Sheet: Universal Health Services Inc.,
inefficiencies, and an uncertain reimbursement environment, management has a limited July 10, 2023
margin of error to preserve margins and cash flows. Tear Sheet: Merck & Co. Inc., July 6, 2023
Stable Condition: MedTech Investment-
Disruptions to cash flows. With EBITDA margins under pressure and interest expenses Grade Credit Prospects Improve; M&A
elevated, speculative-grade service providers' cash flows are already being squeezed. Spending a Key Driver, June 22, 2023
Further pressures to cash flows could come from such things such as the ongoing
implementation of the No Surprises Act or delays in return of volumes and acuity.
M&A activity increasing. We've seen a resurgence in health care M&A, especially in the
pharmaceutical sector, as companies seek to broaden their portfolios and pipelines. This
may result in negative ratings pressure on the subsector in the near term.

Homebuilders and developers Maurice Austin

New York
maurice.austin@
More normalized conditions are finally under construction spglobal.com

+1 212 438 2077

Recession fears alleviated. The U.S. economy was resilient in the first half, and our Outlook Distribution
economists no longer forecast a recession, with a shallower baseline scenario and more Negative Stable Positive
attenuated slowdown. We revised our assumption for total housing starts in 2023 to 1.4 All
million from 1.2 million, but with uncertainty for interest rates and economic conditions. 14% 61% 25%
Investment Grade
Consumers have become acclimated to higher mortgage rates. With rates no longer 80% 20%
likely to be below 5% as in the past, consumers have returned to the market. In addition Speculative Grade
17% 57% 26%
to the added incentives from builders to offset higher than normal cancellations, orders
increased materially in the first half relative to the second half of 2022. 0% 50% 100%
Cancellations are falling to normalized rates. Higher mortgage rates over the past year
significantly affected monthly mortgage payments, precipitating a rise in order
cancellation rates. Increased builder incentive programs, specifically rate buydowns,
helped mitigate higher rates and provided affordability. IG SG All
Ratings 5 23 28
What to look out for? Downgrades 0 0 0
Land spending is higher than expected. The lack of visibility at the start the year led Upgrades 0 0 0
many builders to reduce budgets to conserve cash. As demand has come back strong, Ratings data as of end-Jun 2023. * Year-to-
land spending in the second half could reduce cash balances and cause an upward creep
in leverage. However, decisions will depend on market conditions. We believe there is
enough leverage cushion that prevents material degradation in credit quality. Ratings Outlook Net Bias
A limited resale market supports new homes. This is compounded by many homeowners Net Outlook Bias (%)
50
Homebuilders & Developers
not listing due to their own low mortgage rates, appearing to provide strong support for 40
30
20
the new home market. Orders have increased significantly since the second half of 2022. 10
0
-10
-20
-30
What are the key risks around the baseline? 2015 2016 2017 2018 2019 2020 2021 2022 2023
Stronger-than-expected demand. We had expected revenue declines of 20%-30% and

EBITDA contractions of 25%-30% in 2023 for homebuilders we rate. That said, given their Related Research
stronger-than-anticipated start to the year, we now believe declines will be mixed, with
revenues down about 17%, while EBITDA declines about 35%. In 2024 we expect an uptick Risky Credits: Retail And Health Care Drive
Higher Default Risk In The U.S. And Canada,
of 3.5% in revenues and about 2% in EBITDA.
April 28, 2023
Faster cycle times. Some improvement, specifically early in the construction cycle, is Real Estate Monitor: Higher Rates And
Slower Growth Pressure Credit Quality,
driven by a return to normalized product lead times and improved labor availability. March 21, 2023
However, the back end of the construction cycle remains constrained, as still-tight labor
capacity among those trades continues to pressure the industry.
More-normalized profitability. As mortgage rates surged last year and affordability

decreased, builders increased incentives. As demand surged during the COVID-19
pandemic, we saw a material increase in profitability that we considered unsustainable as
higher demand caused home prices to surge. As market conditions stabilize, incentives
are decreasing while home prices adapt to market conditions. Consequently, we expect
the outsized profit margins of 2022 to normalize through 2024.

Emile Courtney
Hotels, Gaming, and Leisure New York

emile.courtney@
spglobal.com
Even if there's no recession, the leisure surge will slow

+1 212 438 7824
Melissa Long
New York
melissa.long@
What’s changed? spglobal.com
+1 212 438 3886
No recession, but rates higher for longer. Recession is no longer our base case. Still, the
forecasted slowdown in the second half of 2023 and into 2024 presents risks to Rating Trends
discretionary consumer spending and the sector. Rates higher for longer remains at the
Outlook Distribution
front of the conversation, presenting ongoing challenges for low-rated borrowers facing
large near-term maturities or with predominantly variable rate capital structures. Negative Stable Positive
All
Ratings recovery. Except in the cruise sector and U.S.-based gaming companies with 14% 72% 14%
Macao exposure, ratings have largely recovered from the pandemic and outlooks are Investment Grade
90% 10%
mostly stable. Ratings activity has been positive for not-yet-restored ratings and where
Speculative Grade
credit measure cushion is building. 16% 70% 15%
Not much else since last year. Still-low unemployment, residual savings, and pent-up 0% 50% 100%
demand for experiences are leading to another good summer in travel and leisure activity,
and we expect revenue and profitability broadly to continue to recover at least through
this year. Ratings Statistics (YTD)*
IG SG All
What to look out for? Ratings 10 89 99
Slowing growth. Given the shift in consumer spending toward experiences, several Downgrades 0 4 4
leisure sectors are still recovering from the pandemic. Meanwhile, given the propensity of Upgrades 3 9 12
consumers to travel in the U.S. and Europe, a slowing economy may just slow down Ratings data as of end-Jun 2022. * Year-to-
growth rates. date. Current ratings only.
Or maybe a hard landing. The sector mostly relies on discretionary spending, so the risk
of an overheated U.S. economy and higher-for-longer rates could increase downside risks Ratings Outlook Net Bias
for fully recovered sectors once the economy lands. The sector typically experiences Net Outlook Bias (%) Hotels, Gaming & Leisure
declines in revenue and profitability during economic downturns. 20
0
M&A and shareholder returns. Many companies have cushion in leverage and other
-20
-40
credit measures compared to ratings thresholds, which provides capacity for leveraging -60
-80
mergers and acquisitions, investments, and shareholder returns. But what if they happen -100
2015 2016 2017 2018 2019 2020 2021 2022 2023
at the wrong moment?
Macao and Vegas gaming upside. China's reopening offers an enormous boost to the Macao Gaming: Post-Pandemic Recovery,
Macao gaming market and could drive 2023 mass gross gaming revenue higher than our May 25, 2023
U.S. Lodging Outlook: Recovery Of Business
recently upwardly revised base case of 75%-85% of 2019 levels, and full recovery in 2024.
And Group Travel Outweigh Heightened
Las Vegas continues to experience strong leisure travel and the convention and group Macroeconomic Risks -- For The Moment,
market continues to recover, perhaps more so than our already strong baseline. March 23, 2023
Cruise upside. Forward bookings appear to be strengthening faster than our baseline
assumptions and suggest demand for cruises could more easily absorb higher capacity.
Given occupancy is likely to recover to historical levels this summer, the improvement in
EBITDA and credit measures from unsustainable levels could outperform this year.
Lodging downside. RevPAR growth of 5% in 2023 remains plausible. Nonetheless,

tightened personal travel budgets could lead consumers to search for deals or pull back
on travel spending as they prioritize nondiscretionary purchases, pressuring average daily
rates and occupancy in some markets in the latter part of the year and into 2024.

Media and Entertainment Rose Oberman, CFA

New York
rose.oberman@
Secular challenges magnified by an advertising recession spglobal.com

+1 212 438 0354

Prolonged period of slow economic growth. While our base-case economic forecast no Outlook Distribution
longer includes a recession, we expect a prolonged period of slow economic growth will Negative Stable Positive
continue into 2024. Normalized economic growth won't return until 2025-2026. All
21% 73% 6%
Advertising recession enters its second year. Despite resilient consumer spending, U.S. Investment Grade
advertisers remain reluctant to spend in anticipation of an eventual pullback in consumer 88% 13%
spending. We recently lowered our 2023 U.S. ad forecast by 40 basis points to +2.4%. Speculative Grade
25% 71% 4%
There is little transparency into ad trends for the second half of 2023 because advertisers
are buying closer to airtime and not committing to buying in the 2023-2024 TV upfronts. 0% 50% 100%
Focus on streaming profitability. With streamers' shift in focus to profitability, rather

than purely subscriber growth, the rate of growth of programming and nonprogramming
investments has moderated. Disney and Warner Bros. Discovery are on target to achieve
profitability in 2024 while the path for others is murky. Netflix needs to prove to investors IG SG All
that margins can go higher than 20%. Ratings 16 92 108
Downgrades 1 7 8
Subdued high-yield capital market activity. High interest rates are pressuring cash flows Ratings data as of end-Jun 2023. * Year-to-
and weakening credit metrics as companies look to refinance upcoming debt maturities.
Mergers and acquisitions (M&A) activity has also been muted despite opportunities for
stronger companies to add capabilities and scale. Ratings Outlook Net Bias
Defaults on the rise. Year to date, seven U.S. media ratings were lowered to 'D' or 'SD' on Net Outlook Bias (%)
10
Media
either missed interest payments or restructurings. Just over 20% of U.S. media ratings 0
-10
-20
are in the 'CCC' category and nearly 20% are rated 'B-'. -30
-40
-50
Greater focus on cash flow. With interest rates staying higher for longer, we could -60
-70
consider adjusting our view of key credit measures to focus more on free operating cash 2015 2016 2017 2018 2019 2020 2021 2022 2023
flow to debt than on leverage.
Related Research
Second-Half 2023 Media Outlook: Secular
Lower economic growth. The balance of risks to our economic forecast are tilted to the Challenges Magnified By An Ad Recession,
downside. Sticky inflation and higher interest rates for longer could deplete consumer July 10, 2023
savings, weaking consumer discretionary spending especially for media companies. Slides: U.S. Media & Entertainment Industry:
Pouring Recessionary Gasoline On A Secular
File, 2H 2023 Edition, June 23, 2023
Little transparency in ad trends. Digital ads (now 70% of advertising) have shorter lead
Credit FAQ: The Ratings Outlook For The
times and are more directly exposed to consumer spending, providing little visibility into Local TV Industry Is Stable Despite
forward trends. This is exacerbated by advertisers' caution in committing to spending. Emerging Risks To Retransmission Revenue,
May 1, 2023
The subscription economy. Media has moved to a consumer-direct subscription model. Industry Top Trends 2023: Media and
Entertainment, Jan. 23, 2023
In a growing economy this brings improved revenue visibility. In a soft economy, as
discretionary spending power weakens, consumers could reduce their streaming service
subscriptions and drop their pay-TV bundle.
Writers' strike. The writers' strike enters its third month, raising concerns that the longer
it persists, the more damage it does to an already fragile media ecosystem. A lack of new
content will hurt TV and film, streaming, and advertising.

Metals and Mining Don Marleau, CFA

Toronto
donald.marleau@
Unique, scarce assets defend credit quality spglobal.com

+1 416 507 2526

Metal prices drop. Most industrial metal prices are well below highs of 2021 but have not Outlook Distribution
moved down the cost curve far enough to disincentivize production. Oversupply that Negative Stable Positive
wiped out prices and earnings in previous cycles appears less likely, owing to entrenched All
constraints like mining ore grades, energy costs, and trade moats for steel and aluminum. 14% 71% 15%
Investment Grade
Costs squeeze profits. Capital expenditure (capex) discipline is protecting cash flows, 18% 73% 9%
even if some higher-cost producers suffer as operating leverage swings against them. Speculative Grade
13% 70% 17%
Demand for more output to support energy transition metals could spark substantial new
investment, but producers remain cautious in laying out for big new projects. 0% 50% 100%
Credit quality settles at a higher level. We’ve upgraded about 15% of the global portfolio
in the last two years, building on issuers’ multiyear track record of improving cash flow
and declining debt levels. Though the pace of upgrades is slowing, low debt usage and
consistent financial policies mean ratings are generally well positioned. IG SG All
Ratings 11 54 65
Potentially lower prices if economic performance weakens. Metal prices could take a Upgrades 1 6 7
further leg down if slower Chinese growth shifts into deflation and recessionary risks Ratings data as of end-June 2023. * Year-
to-date
transpire for demand elsewhere.
Growing capex plans. The energy transition implies massive investment to supply critical Ratings Outlook Net Bias
metals, and large uncertainties about timing of demand and financial returns for miners.
If the metals industry accelerates its capex, we would expect more risk-sharing Net Outlook Bias (%)
30
Metals & Mining
partnerships among producers, as well as strategic arrangements with customers and 20

10
sovereign capital. 0
-10
-20
Mergers and acquisitions (M&A) pickup. Several transactions are in play as companies -30
-40
align strategies with market developments and expectations. The use of debt to fund 2015 2016 2017 2018 2019 2020 2021 2022 2023
acquisition premiums, however, remains low, mostly because returns dropped after the
last wave of M&A. Deals in mining rarely yield better pricing from consolidation, and cost
synergies are modest unless assets overlap, which is rare. In steel and aluminum, revenue Related Research
and cost synergies are more likely, but these gains often get traded away commercially
S&P Global Ratings' Metal Price
with undisciplined production.
Assumptions: Market Conditions Are
Broadly Supportive, Jul. 17, 2023
What are the key risks around the baseline? U.S. Coal Companies’ Profits Burn Hot,
Melting Debt Against A Bleak Global
Backdrop, May 17, 2023
Looser financial policies. Some metals producers are already increasing investment
Credit FAQ: How S&P Global Ratings
significantly, which could erode hard-earned balance sheet strength if prices and
Formulates, Uses, And Reviews Commodity
operating cash flow decline further. Price Assumptions, April 20, 2023
Costs and corporate development drag on returns. Inflation has been largely
manageable for miners and metal producers so far, owing to the historical correlation of
metals with other costs. Energy bills are falling again, just as revenues from metals drop.
Competitive moats break down. Trade flows of steel and aluminum have often been the
dominant factor in many markets, with undisciplined global production sometimes
overwhelming domestic demand. Constraints from trade policies, higher energy costs,
and pollution or emissions reductions appear to have diminished the prospects for severe
uneconomic overproduction.

Midstream Energy Michael Grande

New York
michael.grande@
Solid credit quality amid a shifting landscape spglobal.com

+1 212 438 2242

Mergers and acquisitions are picking up. ONEOK Inc.'s announced acquisition of Outlook Distribution
Magellan Midstream Partners could be the start of a larger industry consolidation or at a Negative Stable Positive
minimum encourage large, diversified competitors to seek assets that will enhance All
flexibility and optionality for their customers. A key credit consideration will be if such 14% 79% 7%
Investment Grade
actions cause midstream companies to move away from the conservative financial
12% 81% 7%
policies they've fostered during the past several years. Speculative Grade
16% 78% 7%
Growth has slowed. We believe companies will continue to choose to grow organically at
a lower multiple rather than bid for assets. However, that requires a strong backlog that 0% 50% 100%
meets specific return thresholds, which for some industry players is becoming harder to
come by. Fewer opportunities can make a company a target or willingly seek a buyer.
Infrastructure constraints are easing. Legislation may finally clear the path for the
Mountain Valley Pipeline project in Appalachia. Also, industry expertise and strategic IG SG All
partnerships continue to address infrastructure constraints in the west Texas and the Ratings 41 58 99
Gulf Coast region to facilitate the need for natural gas feedstock for the wave of liquefied
Downgrades 0 6 6
natural gas (LNG) projects expected to begin operations by 2026.
Upgrades 1 4 5
What to look out for? date. Current ratings only.
LNG development. The global energy landscape may be forever changed following the
Russia-Ukraine conflict and Europe's energy security concerns. LNG supply, mainly from Ratings Outlook Net Bias
the U.S., has met Europe's needs for now. Another 40 million tons per year from the U.S. Net Outlook Bias Midstream Energy
will reach the final investment decision this year, which will require midstream 0
-5
infrastructure when the additional supply hits the market between 2025 and 2027.
-10
-15
-20
-25
Asset sales and acquisitions. Assets that could be attractive for strategic participants or -30
-35
financial players will likely come to market as companies seek to improve their credit -40
2015 2016 2017 2018 2019 2020 2021 2022 2023
profiles or reposition themselves in an evolving industry.
Changes to capital allocation. After several years of debt reduction throughout the
industry, most companies are focused on growth and striking a balance between Related Research
rewarding shareholders and being deferential to debtholders. Policy changes that weaken
Credit Considerations: The North American
the current balance could harm credit quality.
Midstream Energy Sector's Momentum Has
Slowed, July 5, 2023
Clear LNG Outlook Could Turn Murky Near
What are the key risks around the baseline? End Of Decade, June 27, 2023
Investment-Grade Issuers Weathered
Economic slowdown. The increased risk of recession and ongoing inflationary pressure is Pandemic-Related Volatility By Focusing On
unlikely to have a material impact on ratings. However, it could change companies’ Leverage Reduction, May 2, 2023
Issuer Ranking: North And South American
approach to growth projects and capital allocation and put speculative-grade issuers Midstream Energy Companies, Strongest To
more at risk of credit deterioration. Weakest, March 31, 2023
Credit FAQ: How we Assess Hybrid
Capital markets access. Refinancing risk could increase and project funding may be Replacement Decisions When Credit Quality
more difficult if capital markets are not open due to a banking or economic crisis. Improves: A Focus On Midstream Energy,
March 6, 2023
Increased regulatory risk. More-stringent regulation or unfavorable adjudication in the
courts could be a headwind for the industry.

Oil and Gas Thomas Watters

New York
thomas.watters@
Cash flow builds resilience, but challenges abound spglobal.com

+1 212 438 7818

Global gas demand and prices are weaker. Prices fell substantially due to mild winter Outlook Distribution
weather leading to weak demand for gas, and high storage levels in Europe. Negative Stable Positive
All
OPEC+ and non-OPEC production. Decisive OPEC+ cuts avoided further declines in oil 3% 75% 22%
prices and restored spare capacity as non-OPEC supply meets still growing demand. Investment Grade
4% 89% 7%
Companies are adapting strategies. As government policies and demand dynamics Speculative Grade
3% 70% 28%
evolve, companies are reprioritizing investments in oil and across low-carbon activities.
0% 50% 100%

Global and national (geo)politics. Government actions and policies remain critical and
sometimes unpredictable factors for energy demand and supply. IG SG All
Cost and capital expenditure inflation look manageable. Financial discipline and cost Ratings 28 79 107
control remain the watchwords for public companies, but oilfield service companies have Downgrades 0 1 1
better prospects for passing through wage and other cost increases. While lower Upgrades 0 14 14
commodity prices are beginning to impact North American drilling activity, longer-cycle Ratings data as of end-Jun 2023. * Year-to-
international and offshore projects continue to move forward. date. Current ratings only.
Shifts in gas markets. Europe's structural move away from Russian piped gas is
underpinning liquefied natural gas (LNG) demand, even as its overall gas demand Ratings Outlook Net Bias
declines. Net Outlook Bias (%) Oil & Gas
40
20
0
What are the key risks around the baseline? -20

-40
-60
-80
The Russia/Ukraine conflict. Supply concerns for both oil and gas have moderated but -100
2015 2016 2017 2018 2019 2020 2021 2022 2023
could easily flare up and lift prices.
Oil market balances. Our baseline assumes tighter markets and stock draws in the
second half of 2023 with Brent at $85 per barrel (/bbl) and WTI at $80/bbl. Recession or Related Research
deflation risks could sap demand growth, keeping prices soft.
Clear LNG Outlook Could Turn Murky Near
End Of Decade, June 27, 2023
A loss of financial discipline. There is a risk that producers might step-up investment
S&P Global Ratings Lowers Hydrocarbon
significantly, only for prices and operating cash flow to fall further. This could erode the Price Assumptions On Moderate Demand,
balance sheet strength built up since 2021. June 22, 2023
Price Assumptions, April 20, 2023

Real Estate Ana Lai, CFA

New York
Ana.lai@
Higher-for-longer interest rates are a headwind spglobal.com

+1 212 438 6895

Sharp increase in interest rates will slow external growth. The impact from the rate Outlook Distribution
increases will be felt across the sector and pressure asset valuations. The sector is Negative Stable Positive
adjusting to the "higher for longer" environment by slowing external growth plans, while All
debt issuance remains low due to wide bond spreads. 14% 79% 7%
Investment Grade
Heightened refinancing risk. Banks' tighter lending standards, coupled with earnings 6% 88% 6%
pressure for some companies, have led to increasing refinancing risk, particularly for Speculative Grade
47% 41% 12%
many office REITs and lower-rated credits.
0% 50% 100%
Growing negative rating bias. Weaker fundamentals in the office sector have driven the
growing negative rating bias. With about 14% of ratings on negative outlook vs. 7% on
positive, we expect more downgrades than upgrades over the next year. Office REITs face
significantly higher downgrade risk than other subsectors given that about 50% of the
office REITs have negative outlooks. Four office REITs have become fallen angels within IG SG All
the last year and there could be more over the next 12-24 months. Ratings 67 17 84
Downgrades 1 6 7
Higher funding costs pressure cash flow metrics. We expect debt service coverage Ratings data as of end-Jun 2023. * Year-to-
metrics to deteriorate as REITs refinance their low-coupon debt at materially higher
rates. We expect a deterioration in fixed-charge coverage ratios while total debt to
EBITDA may take longer to recover given earnings pressure. Ratings Outlook Net Bias
Shifts in refinancing strategy. Rated U.S. REITs face about $14 billion of debt maturing in Net Outlook Bias (%)
20
Real Estate
2023 and $23 billion coming due in 2024—and the maturity walls expand in the 15
10
5
subsequent years. With largely unencumbered balance sheets, refinancing options likely 0
-5
include secured funding, given the volatility and higher expected coupons in the -10
-15
unsecured bond market. Added exposure to secured debt could put holders of unsecured -20
2015 2016 2017 2018 2019 2020 2021 2022 2023
debt at a disadvantage and could result in notching down of unsecured debt.
Recovery of leasing activity could be slow for offices. Given secular and cyclical
headwinds, we expect leasing activity to remain weak. High exposure to lumpy near-term Related Research
lease expirations could add pressure to occupancy and rent. We expect higher
Real Estate Monitor: Tightening Access to
concessions, including tenant improvements and additional free months of rent, to
Capital Heightens Refinancing Risk, June 5,
weaken cash flows. 2023
Stressful Conditions For U.S. Commercial

Real Estate Are Raising Refinancing Risk,
What are the key risks around the baseline? June 5, 2023
Real Estate Monitor: Rising Rates Driving

Weaker economic and job growth. While the U.S. economy remains resilient and our
Rental Housing Resiliency, March 30, 2023
baseline forecast no longer assumes a recession, we now expect a period of slow growth
and higher-for-longer interest rates. This scenario could hurt rate-sensitive sectors such
as real estate, prolonging the downturn.
Asset valuations could erode further as real rates rise. Transaction volume remains
muted and we're currently in a period of price discovery. As pricing expectations are
reset, we expect the entire office real estate stock will face declines from rising rates and
risk premia, as property-level cash flow comes under pressure. Lower-quality office real
estate is facing materially greater pressure than the REITs we rate.

Regulated Utilities Gabe Grosberg

New York
gabe.grosberg@
Credit quality should stabilize spglobal.com

+1 212 438 6043

Industry outlook. In May we revised the industry’s outlook to stable from negative, where Outlook Distribution
it had been since early 2020. During the past three years, downgrades outpaced upgrades Negative Stable Positive
by more than 3:1 and the median industry rating fell to 'BBB+' from 'A-'. Over the next two All
years, we expect upgrades and downgrades will be more balanced. 16% 72% 12%
Investment Grade
Economic indicators are improving. Over the past year, inflation increased at a slower 16% 72% 12%
rate and natural gas prices significantly retreated from 2022 highs of $9 per MMBtu, Speculative Grade
43% 57%
improving the industry’s financial performance.
0% 50% 100%
Credit-supportive tools reduce the impact of physical risks. We don't expect the pace of
hurricanes, wildfires, or storms to decline because of climate change. But we do expect
system hardening, wildfire mitigation, higher storm reserves, self-insurance, and
securitization will reduce much of the associated credit risks.
IG SG All

Downgrades 3 1 4
Record-high capital spending. For 2023 and 2024, we expect the industry’s capital
spending will exceed $200 billion partly driven by energy transition, and negative Upgrades 2 0 2
discretionary cash flow will be greater than $100 billion. To maintain credit quality, the Ratings data as of end-Jun 2023. * Year-to-
industry requires consistent access to the capital markets, financing these projects with
debt and equity in a balanced manner.
Weak financial measures. Currently about 35% of the industry strategically operates with
Net Outlook Bias (%) North America - Regulated Utilities
only minimal financial cushion from their downgrade threshold. Should risks increase 20
beyond our base case, credit quality could be pressured. 10

0
Wildfires risks. In a recent class action wildfire lawsuit, an Oregon jury awarded an
-10
-20
average of $5.3 million per plaintiff. This was significantly above our base case and could -30
15 16 17 18 19 20 21 22 23
have broader industry credit implications.
Related Research
Views On North American Utility Regulatory
Natural gas prices. This commodity cost has a significant impact on the customer bill and Jurisdictions: Assessment Revisions and
rising natural gas prices would erode much of the customer bill cushion, pressuring the Notable Developments, July 10, 2023
The Outlook For North American Regulated
industry's ability to manage regulatory risk. Utilities Turns Stable, May 18, 2023
Interest rates. Because of regulatory lag, rising interest rates continues to pressure the
industry’s financial performance.
Effectively managing regulatory risks. Currently the industry has filed for about $30
billion in rate case increases. Fair outcomes in these cases are important for the
industry’s credit quality.

Retail and Restaurants Sarah Wyeth

New York
sarah.wyeth@
Value reigns as consumers grow increasingly cautious spglobal.com

+1 212 438 5658

Pressure is increasing on middle- and lower-income consumers. Per reports from dollar Outlook Distribution
stores, consumers are shifting spending to food from discretionary categories. Even high- Negative Stable Positive
income consumers are adopting budget-conscious shopping behaviors. Luxury retailers All
reported a sequential monthly deterioration in sales in the first quarter. 22% 73% 5%
Investment Grade
Consumers trading down favors some retailers. Off-price and discounters will attract 8% 92%
cautious consumers, and retailers that carry basics like groceries are better positioned Speculative Grade
27% 66% 7%
than those that carry only discretionary categories. Walmart benefits on both fronts.
Bargain hunting pressures all retailers to compete on price, forcing promotional activity. 0% 50% 100%
Unless cost structures are designed for lower prices, margins will contract, especially for
retailers like department stores and specialty apparel.
Elevated costs and residual supply chain snags continue to strain some retailers.
Although shipping, freight, and other costs have moderated or declined, labor costs IG SG All
remain elevated. Retailers like The Michaels Cos. Inc. that contracted shipping capacity at Ratings 39 106 145
high rates have struggled to pass forward costs in a softening environment. Product
Downgrades 0 13 13
availability remains challenging in pockets, which contributed to operating pressure at
Advance Auto Parts Inc. Upgrades 2 12 14
Typically, dining out is one of the first expenses financially strained consumers cut. Ratings Outlook Net Bias
However, lower discretionary spending has yet to significantly hurt restaurants. Spending Net Outlook Bias (%) Retail and Restaurants
remains well above pre-pandemic levels, and demand at casual diners, usually the most 10
0
vulnerable to economic weakness, remains solid. However, nominal spending at -10

-20
restaurants has been flat since October 2022 per the U.S. Census Bureau. When adjusted -30
-40
for inflation, year-over-year volumes declined in May, suggesting emerging cracks in -50
-60
demand for dining out. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Higher interest rates could strain cash flows of issuers with the weakest credit metrics.
We expect the Fed funds rate will remain over 5.0% through 2023 before the Fed makes
gradual cuts in 2024. For issuers with thin cash flow measures, access to debt markets
Related Research
could be difficult or impossible, triggering a default. To date, the retail sector's default Economic Outlook U.S. Q3 2023: A Sticky
rate of 6%-7% is well above the broader corporate default rate of over 2% and is Slowdown Means Higher For Longer, June
26, 2023
approaching pre-pandemic levels, where we expect it to remain going into 2024.
Credit FAQ: The Road Ahead For Advance
Auto Parts Inc., June 23, 2023
What are the key risks around the baseline? Credit FAQ: Hot Retail And Restaurant
Topics In A Cooling Economy, June 1, 2023
The U.S. economy dips into a recession. Consumer sentiment remains relatively low and
Credit FAQ: Where Does The Kroger,
households' financial health has deteriorated. However, aggregate U.S. retail sales are Albertsons Merger Stand?, May 31, 2023
well above 2019. If the Fed's efforts to cool the economy damages the jobs market, the
last pillar of support for consumers, a bigger pull-back in spending is likely.
Inflation persists, especially in labor costs, pressuring margins more than we expect.
Commodities, energy, freight, shipping, transportation, and more costs have declined
from 2021 peaks. As long as sufficient demand enables retailers to pass along still-high
labor costs, we expect margins to remain stable or gradually improve. However, if a shock
reignites inflation, with a cautious consumer, retailers would be back in a hard place.

Technology David Tsui

San Francisco
david.tsui@
Elevated rates most detrimental to speculative-grade issuers spglobal.com

+1 415 371 5063

Information technology (IT) spending is weaker. We revised our 2023 IT spending growth Outlook Distribution
forecast to 2.2% in June from 2.4% in May and 3.3% in January. While we revised our U.S. Negative Stable Positive
GDP growth forecast for 2023 up to 1.7%, more cautious budgets in both consumer (PC, All
smartphone) and enterprise (server) have put pressure on overall IT spending. 14% 83% 3%
Investment Grade
We expect a lower growth rate environment rather than a recession. A more resilient 2% 95% 3%
North American economy and stickier inflation will likely keep rates higher for longer, Speculative Grade
18% 78% 3%
pressuring companies with variable-rate debt structure the most.
0% 50% 100%
Rating trends remain negative. They deteriorated further in the first half of 2023, with
negative vs. positive rating actions near 1 to 1 for investment-grade issuers and 3.5 to 1 for
speculative-grade, in contrast to 3 to 4 and 4 to 1, respectively, in 2022.
IG SG All
Ratings 62 190 252
Margin pressure is likely given IT budget constraints. Below-trend demand, excess
Downgrades 2 18 20
inventory, and IT budget constraints are an unfavorable combination that should
compress margins. The impact on tech vendors and service providers varies depending Upgrades 2 5 7
on the "mission-critical" nature of offerings and price elasticity. Ratings data as of end-Jun 2023. * Year-to-
Large-scale mergers and acquisitions slowed to a crawl. The Microsoft/Activision,
Broadcom/VMware, and Adobe/Figma transactions announced in 2022 have yet to Ratings Outlook Net Bias
receive necessary regulatory clearance to close. Geopolitical tension, antitrust concerns,
higher funding costs, and a still uncertain macroeconomic environment are the main Net Outlook Bias (%)
10
Technology
culprits. 5
0
-5
Macroeconomic uncertainty or lower growth could lead to more disciplined financial -10
policies. Most speculative-grade issuers are likely to favor liquidity preservation given -15
-20
their higher interest burden. However, it is unclear if investment-grade issuers with 2015 2016 2017 2018 2019 2020 2021 2022 2023
conservative financial risk profiles will maintain their capital allocation policies that
include meaningful shareholder returns.
Related Research
What are the key risks around the baseline? Bottom Is In Sight For U.S. Tech Earnings
With A Modest Rebound Expected For
Supply chain risk reduction and bans on chip sales are net negative to U.S. chipmakers. Second Half Of 2023, May 10, 2023
Global tech firms are diversifying their supply chains away from China to manage Tighter Credit Conditions May Be Next Shoe
geopolitical, policy, and concentration risk, which is likely cost inflationary. Nevertheless, To Drop For Speculative-Grade Tech
Companies, April 3, 2023
geopolitical tensions continue to rise, adding incremental credit risk to semiconductor
Excess Inventory Is The First Roadblock To
and hardware providers.
Tech Recovery, March 31, 2023
Rising rates kept elevated for longer. Free cash flow for many highly leveraged issuers in
the 'B' rating category has been absorbed by higher interest expense. Rating pressure will
intensify if this is coupled with a weaker-than-expected business environment in the
second half of 2023.
Hard landing. IT spending is highly correlated with global GDP growth rates. While the U.S.
economy has demonstrated resilience thus far into the rate hiking cycle, uncertainty
remains from the lag impact on the economy. A significant rebound in IT spending is less
likely in the second half of 2023 and, maybe, 2024.

Telecommunications Allyn Arden, CFA

New York
allyn.arden@
Credit risk increasing due to competition and higher rates spglobal.com

+1 212 438 7832

Fixed Wireless Access (FWA). FWA continues to garner the lion’s share of high-speed Outlook Distribution
data (HSD) customers, resulting in limited growth in cable HSD subscribers and in many Negative Stable Positive
cases, net customer losses. However, the pace of FWA appears to have leveled off, with All
T-Mobile and Verizon adding fewer HSD customers than previous quarters. 26% 71% 3%
Investment Grade
Tighter financing conditions are taking a toll on low-rated entities. Macroeconomic 8% 92%
headwinds are now causing some wireline operators to scale back their fiber builds to Speculative Grade
30% 66% 4%
conserve cash flow. At the same time, their legacy businesses continue to decline,
leading to lower overall revenue and EBITDA. We lowered the ratings on Lumen 0% 50% 100%
(B/Negative) twice during the year over concerns related to management strategy, which
will lead to weak cash flow metrics and higher leverage in the near-term. We also lowered
our ratings on Dish to 'CCC+' with a negative outlook due to challenging operating Ratings Statistics (YTD)*
conditions and significant capital requirements, creating uncertainty over the
IG SG All
sustainability of its capital structure.
Ratings 13 53 66
Downgrades 1 6 7
Upgrades 1 3 4
The pace of fiber-to-the-home (FTTH) builds. Overall, we expect the wirelines to scale Ratings data as of end-Jun 2023. * Year-to-
back their FTTH deployments in 2023 relative to our previous expectations due to higher date. Current ratings only.
labor costs, inflation, and rising interest rates. Given their high leverage, funding needs,
and exposure to floating-rate debt, we expect the pace of builds to slow over the next few Ratings Outlook Net Bias
years, which could alleviate some competitive pressure on the cable operators.
Net Outlook Bias (%) Telecommunication Services
Cable earnings trends. We expect large cable operators Charter and Comcast to still 0
-5
generate low-single-digit earnings growth as average revenue per user (ARPU) grows -10
-15
about 3%-4%. However, risks around our forecasts will increase if the pace of new home -20
formation and edge-out activity slow and competition from FTTH and FWA intensifies. -25
-30
2015 2016 2017 2018 2019 2020 2021 2022 2023
Broadband Equity, Access, and Deployment (BEAD) program subsidies. The $42 billion
BEAD program began allocating money to states, with 19 states set to receive more than
$1 billion for high-speed internet builds. States will now begin the process of submitting
an initial proposal for approval to the National Television and Information Administration
Related Research
(NTIA) before selecting program award winners and releasing funds, which could take up Dish Network Corp. Rating Lowered To
to 12-18 months. 'CCC+' On Cash Flow Uncertainty; Outlook
Negative, April 27, 2023
Credit FAQ: Calculating Leverage For
What are the key risks around the baseline? Selected U.S. Telecommunications And
Cable Companies (2023 Update), April 17,
2023
Interest rate hikes or higher rates for longer. While the telecommunications industry is Lumen Technologies Inc. Downgraded To 'B'
more recession resistant than most other corporate sectors, many issuers have little From 'B+' On Debt Exchange; Debt Rating
Actions Taken; Outlook Negative, March 22,
cushion at current ratings to absorb higher interest rates and weaker cash generation. 2023
Elevated competition could slow cable ARPU growth. The availability of cheaper FWA
could result in softer ARPU growth, particularly in a weaker economy if cable operators
respond by offering more promotions. Increasing competition from FTTH could also make
it challenging to grow ARPU if they offer lower prices.
Wireless competition intensifies. Growth prospects in the wireless industry are limited
because of slower subscriber growth and increasing competition. Dish is now set to offer
a postpaid wireless service, which could result in pricing pressure.

Transportation Infrastructure Dhaval Shah

Toronto
dhaval.shah@
Mobility grows despite affordability risks spglobal.com

+1 416 562 9175

Pent-up travel demand outweighs affordability concerns. Volumes for most Outlook Distribution
transportation assets continue to increase despite a material step-up of user fees and an Negative Stable
erosion in disposable income. This has helped U.S. airports to recover to pre-pandemic All
levels. For some toll roads, higher traffic demand and toll increases have grown revenues 17% 83%
P3 - Availability
by double digits over the past year.
15% 85%
Peak-time toll road demand is lagging. While overall volume is increasing, peak time P3 - Volume Risk
19% 81%
volumes are performing lower than expected given changes in commute times and
frequency. 0% 50% 100%
Supply chains have normalized. However, the construction industry is still grappling with
high costs, rising interest rates, and liquidity risks. Several rated construction companies Ratings Statistics (YTD)*
have faced negative rating actions since the beginning of this year (e.g. Flour Corp.).
P3 P3 All
Availability Vol.
risk
Ratings 13 16 29
Slower peak traffic could influence toll policies or change revenue mix. For managed-
Downgrades 0 0 0
lanes or toll roads (like 407 International) that charge based on time periods, toll
rates/revenues for off-/mid-peak may increase faster than for peak. Moreover, for 407 Upgrades 1 3 4
International this phenomenon can influence timing and magnitude of toll increases. Ratings data as of end-June 2023. * Year-
to-date
New ways of risk sharing. We expect construction risk sharing to evolve as contractors,
project finance entities, and government entities find new ways to manage risks.
Related Research
Bipartisan Infrastructure Law spending. Return of large capital programs and federal
Industry Top Trends 2023: Transportation
spending from the Bipartisan Infrastructure Law is somewhat offsetting inflationary
Infrastructure, Jan. 23, 2023
pressures on the construction pipeline. Industry Report Card: Global Toll Road
Industry Proves Most Resilient Among
Re-leveraging driven by significant revenue growth. Transportation infrastructure Transportation Infrastructure Assets, Oct.
entities typically maintain their credit quality by re-leveraging on the back of improvement 11, 2022
in credit metrics (based on large inflation-linked toll increases and unfettered demand
response). Despite the high interest rates, we expect infrastructure sponsors to take
debt-funded distributions driven by substantial toll revenue growth.

Recession and affordability risks. A more severe recession than we currently forecast
could weaken disposable income and travel demand, and activity in transporting goods.
Counterparty pressure. Weakened creditworthiness and liquidity pressures could hinder

contractors’ construction progress or acceleration efforts, leading to project delays or,
where there is a linkage to the contractor, a deterioration in project credit quality.
Geopolitical tensions. An escalation of the Russia-Ukraine war or China-U.S. tensions

could weigh on global trade, commodity prices, and consumer sentiment around travel.

Transportation Jarrett Bilous

Toronto
jarrett.bilous@
Strong air travel demand but slowing freight spglobal.com

+1 416 507 2593

The outlook for mainline airlines has improved. Demand for passenger air travel is Outlook Distribution
showing no signs of softening. We took several positive rating actions on the North Negative Stable Positive
America-based mainline airlines and no longer assume a U.S. recession - previously All
viewed as a key source of potential near-term risk. We expect high fares and capacity 12% 73% 15%
Investment Grade
expansion to mitigate the impact of rising labor costs and high (albeit lower) jet fuel prices
8% 76% 16%
on margins. Speculative Grade
14% 71% 14%
Freight markets have weakened but rating buffer persists. Freight transportation
providers are facing slowing demand as consumers prioritize services, such as travel, over 0% 50% 100%
goods. Package express companies are adjusting to a normalized post-pandemic e-
commerce environment. Meanwhile, railroads are experiencing softness in some
economically-sensitive segments and greater price competition from trucking. Moreover, Ratings Statistics (YTD)*
the potential credit impact from excess air cargo capacity is growing. However, most
IG SG All
issuers have ample rating capacity to endure weaker demand fundamentals this year.
Ratings 25 42 67
Higher financing costs are looming. Higher funding costs have been manageable for
Downgrades 1 2 3
most airline and aircraft/equipment leasing companies, following several recently
completed financings. However, we now expect interest rates to climb above our previous Upgrades 1 2 3
assumptions, increasing liquidity and refinancing risk notably for lower-rated Ratings data as of end-Jun 2023. * Year-to-
transportation companies with upcoming debt maturities.

Net Outlook Bias (%) Transportation
Slowing airline bookings and capacity expansion. Revenue visibility much beyond the 5
-5
seasonally strong summer months is limited and airline travel is historically highly cyclical. -15
-25
Weaker-than-expected demand could result from persistently high fares as consumers -35
contend with high inflation. Ongoing supply constraints (i.e., labor, aircraft, air traffic -45
-55
control, maintenance) also pose a risk to traffic growth and margins. 2015 2016 2017 2018 2019 2020 2021 2022 2023
When will excess trucking capacity exit the industry? Trucking spot rates have sharply
deteriorated due to lower volumes and excess capacity. With volumes expected to remain
soft this year, trucking capacity will likely need to decline before spot rates can recover.
Related Research
The Big 3 U.S. Airlines Are Poised For Credit
Fuel price volatility. Jet fuel prices have eased from historical peak levels in 2022 but
Recovery Amid Looming U.S. Recession,
remain high, are unpredictable, and can lead to a material impact on airline margins. April 6, 2023
United Airlines Holdings Inc. Upgraded To

‘BB-‘From 'B+' On Strong Credit Measures;
What are the key risks around the baseline? Outlook Stable, March 28, 2023
Delta Air Lines Inc. Outlook Revised To

Macroeconomic uncertainty. A recession could notably derail the recovery in freight
Positive From Stable On Strong Demand,
volumes we assume for next year. March 24, 2023
Constrained capacity. The U.S. unemployment rate is at a multi-decade low and wage American Airlines Group Inc. Outlook
Revised To Positive On Demand Strength;
growth is relatively high. While labor tightness has recently showed signs of easing, Certain Issue Ratings Raised, March 24,
shortages could lead to inefficiencies and stall volume/capacity growth. 2023
Geopolitical risk. Additional geopolitical turmoil could lead to global economic and
financial market instability, and weaken consumer demand and issuer's credit profiles.

Unregulated Power Aneesh Prabhu

New York
aneesh.prabhu@
Energy transition: The only thing constant is change spglobal.com

+1 212 438 1285

The end of an epic bull run. Following the decline in natural gas prices in 2023, power Outlook Distribution
prices are down 45%, 20%, and 10%, on average (from their highs in Sept. 2022) for Negative Stable Positive
calendar years 2023, 2024, and 2025, respectively. For perspective, they are still about All
30% higher than forward power price expectations at year-end 2021. 8% 89% 3%
Investment Grade
Nuclear momentum. After more than a decade of headwinds, the nuclear power 6% 89% 6%
industry's game-changing federal production tax credits have resulted in a soft pricing Speculative Grade
9% 88% 2%
floor at $40-$44/MWh. With improved economics, assets have already transacted.
0% 50% 100%
Strategies are still evolving. Companies such as NRG Energy now see risk in owning any
form of generation, while others see a significant role for some forms of generation as an
energy transition bridge. This is manifesting in diverging strategies like sale (NRG) and
purchase (Vistra) of nuclear generation.
IG SG All

Downgrades 0 1 1
Hedging strategies and execution. We see backwardation in prices through 2025. While
companies have layered hedges through 2025, we see the potential for cash flow Upgrades 0 1 1
weakness compared to forecasts in the off-peak months. We're assessing hedging Ratings data as of end-Jun 2023. * Year-to-
strategies through 2025 to fine-tune forecasts.
Capital allocation decisions. While companies have pivoted to shareholder returns in the Ratings Outlook Net Bias
past few years, we see a widening of basis in spreads even within the 'BB' category. We
expect some focus on debt reduction in 2023, even at private companies like Calpine. Net Outlook Bias (%)
0
North America - Unregulated Power
-5
Environmental rulemaking. The EPA is proposing Clean Air Act emission limits and -10
-15
guidelines for CO2 from fossil generation that could hurt gas-fired generation. The idea is -20
-25
to push plants toward using carbon capture and hydrogen blending technology, -30
-35
particularly with new inflation Reduction Act (IRA) tax credits providing support. 15 16 17 18 19 20 21 22 23
Related Research
What’s A Nuclear Plant Really Worth, April
The IRA's impact on storage/renewable proliferation. We see pricing differential in the 13, 2023
"as produced" and firm renewable energy product. How the additional tax incentive for Issuer Ranking: North American Merchant
renewable power (and stand-alone tax incentive for storage) affect deployment could Power Companies, Strongest To Weakest,
April 13, 2023
impact the value of gas-fired generation.
U.S. Inflation Reduction Act Highlights
Diverging Approaches With Europe, March 1,
An economic slowdown. Power is leveraged to both prices and demand growth. While 2023
power demand is still holding, a slowdown in natural gas demand affects the marginal
cost of power (even if power demand holds).
The interest rate environment affects capex and asset acquisitions. We expect to see
distribution growth expectations of companies like NextEra Energy Partners to be
tempered. Separately, ERCOT's low interest financing from the state to fund the
construction of dispatchable electricity could affect independents in the medium term.

Industry Top Trends Update | Europe
Aerospace and Defense David Matthews

London
david.matthews@
It’s all about the supply chain spglobal.com

+44 20 7176 3611

Airbus continues to raise A320 production to historical highs. Narrow-body production Outlook Distribution
is booked out for the next few years, but the civil aerospace supply chain is creaking as Negative Stable Positive
volumes continue to ramp up. Forgings, castings, and the availability of some raw All
materials remain sources of bottlenecks. 6% 71% 24%
Investment Grade
Wide-body production to remain flat through 2024. Although long-haul routes are back, 20% 80%
they are yet to reach capacity. As a result, we don't expect demand for, and production Speculative Grade
67% 33%
of, wide-body aircraft to exhibit the same ramp-up as narrow-body planes until at least
end-2024. 0% 50% 100%
Defense fundamentals are even stronger than before. The Russia-Ukraine conflict has
spiked demand for products like battlefield radar, unmanned aerial vehicles, and
munitions. Rising defense budgets are enabling the European issuers that we rate to win
some large contracts. IG SG All
Ratings 5 12 17
Some suppliers are building financial firepower for opportunistic M&As. We view the Upgrades 0 3 3
civil aerospace supply chain as ripe for consolidation and expect some suppliers to step Ratings data as of end-Jun 2023. * Year-to-
in to take over smaller, ailing manufacturers who struggled to recover from the pandemic.
Working capital--and therefore free operating cash flows--could be lumpy for some Ratings Outlook Net Bias
defense players. Large contract wins often come with hefty advance payments, the
timing and size of which can be hard to predict. Net Outlook Bias (%)
40
Aerospace & Defense
20
Ambitious forecasts could result in higher shareholder returns. Some rated issuers have 0
-20
indicated that if favorable market conditions persist and financial targets are hit, then -40
they may buy back shares to return cash to investors. -60

-80
2015 2016 2017 2018 2019 2020 2021 2022 2023

Supply-chain disruption and bottlenecks hinder manufacturers' ability to raise Related Research
production rates. If supply chain conditions worsen, production and delivery targets
Israel Aerospace Industries Ltd. Upgraded
could be missed. To 'BBB+'; Outlook Stable, July 12, 2023
GKN Holdings Ltd. ‘BB+’ Ratings Affirmed
Overly aggressive financial policies. Share buybacks by large investment-grade players After Dowlais Demerger; Outlook Stable,
are unlikely to damage credit quality, but some smaller sub-investment-grade issuers are June 21, 2023
already highly leveraged and unlikely to be able to bear more aggressive financial policies Spain-Based Aernnova Aerospace Corp.
S.A. Upgraded To 'B' On Improving
from their shareholders without ratings pressure. Operating Performance; Outlook Stable,
March 17, 2023
A sudden geopolitical change could shift priorities at short notice. At present, Europe is Rolls-Royce PLC Upgraded To 'BB' On
focused on the Russia-Ukraine war. In the U.S., the pivot to the Asia-Pacific region is Strong Operating Performance And Positive
Cash Flow Generation; Outlook Positive,
driving the defense strategy. However, sudden developments elsewhere could lead
March 13, 2023
governments to reprioritize where they spend money and on which platforms.

Autos Vittoria Ferraris

Milan
vittoria.ferraris@
Heading toward a moderate slowdown spglobal.com

+39 02 72 111 207

Fears of weakening demand have subsided. This is partly thanks to orders building up in Outlook Distribution
2022 due to supply chain and logistical disruptions. We estimate that year on year, Negative Stable Positive
production will be more than 10% higher in the first half of 2023. We believe that this has All
helped fulfil orders and replenish inventories. 20% 71% 9%
Investment Grade
Prices have peaked. Supply shortages are subsiding and prices for new and used cars are 7% 86% 7%
normalizing compared with the record highs of summer 2022. Nevertheless, most original Speculative Grade
29% 62% 10%
equipment manufacturers (OEMs) remain disciplined about pricing, which will support
auto manufacturers' results in 2023. 0% 50% 100%
The appeal of Chinese electric vehicles (EVs) in Europe exceeds expectations, even in
brand-loyal markets. Chinese OEMs capitalize on their agile cost structures and reliable
supply chains to penetrate markets where consumers can take advantage of subsidies
irrespective of where the EVs were produced. Chinese OEMs have no interest in a price IG SG All
war, but if they decide to chase market share, this could make it harder for incumbents to Ratings 14 21 35
achieve their profitability targets.
Downgrades 0 1 1
Upgrades 2 2 4
What to look out for? Ratings data as of end-June 2023. * Year-
to-date. Current ratings only.
The pace of new orders in the second and third quarters. This will be key in assessing
the strength of demand beyond the supply shortage-driven backlog and despite
increased prices and tighter funding conditions. Ratings Outlook Net Bias
A gradual weakening of demand and pricing. We expect this to materialize more clearly Net Outlook Bias (%)
40
Autos
in the second half of this year. We believe that a more prudent stance on production is 20
0
likely compared to what we saw in the first half. This contrasts with the views of several -20
auto suppliers, who expect a stronger second half. That said, we believe that higher
-40
-60
content per car could at least partially offset gradually declining volumes. -80
2015 2016 2017 2018 2019 2020 2021 2022 2023
Fluctuations in EV sales. EV sales growth remains positive in Europe, but the share of EVs
in the sales mix declined to 19% in the year to April 2023 from 22% at end-2022. We put
this down to the high price difference between electrified and traditional vehicles and Related Research
lower subsidies. This makes EVs less affordable, especially at a time of high inflation.
Autoflash EMEA: Car Makers And Suppliers
See Past Economic Roadblocks, April 21,
2023
What are the key risks around the baseline? Global Auto Sales Forecasts: Macro Risks
Demand Pricing And Production Discipline,
Persistent inflation bodes ill for interest rates. The magnitude of additional interest rate April 18, 2023
hikes will be a decisive factor in consumers' decisions to purchase new cars.
Heightening competition due to cost-agile entrants. A price war to increase market

share could exacerbate the margin dilution we forecast at legacy OEMs due to the
increasing penetration of EVs between now and 2025.
Growing geopolitical tensions between the U.S. and Europe on one side, and China on
the other. The U.S. and Europe are trying to reduce their dependence on China for raw
materials, while China is restricting exports of key metals for use in electronics and
semiconductors.

Building Materials Renato Panichi

Milan
renato.panichi@
Stable credit quality, with some weakness in the 'B' category spglobal.com
+39 02 72 111 215

Volume decline is spreading to most countries. We anticipate mid-to-high single-digit volume Outlook Distribution
decline in residential construction in 2023-2024 in most countries, particularly in the Nordics, Negative Stable Positive
Eastern Europe, and Germany. The sharp rise of interest rates has worsened household ability All
to finance housing investment, as mortgage rates have more than doubled in most countries. 16% 76% 8%
Investment Grade
Lower energy costs will help margin resilience. Spot energy prices have significantly 7% 93%
dropped since the 2022 peak, particularly natural gas and electricity. We anticipate some Speculative Grade
21% 67% 13%
prices will rebound ahead of next winter, but costs should remain well below the average
of the past winter. This should help the margins of high-energy-consuming companies. 0% 50% 100%
Increased interest costs dent free operating cash flow. Current prevailing interest rates
of 8.5%- 9.5% for refinancing transactions in the 'B' category mean an average increase of
about 300 basis points compared with 2021, when debt was priced at historically low
levels. Most companies rated 'B-' or in the 'CCC' category will have to adapt their capital IG SG All
structure (that is, a lower debt quantum) to continue their operations. Ratings 14 24 38
Downgrades 0 1 1
Credit quality remains largely stable in the investment-grade category. Almost all Ratings data as of end-Jun 2023. * Year-to-
companies display a stable outlook, indicating their ability to withstand the current
business downturn thanks to rating headroom built following solid results in 2021-2022.
Negative outlook bias will likely persist in the speculative-grade category. We
anticipate credit pressure on those companies that entered the business downturn with Net Outlook Bias (%)
10
Building Materials
already-high leverage metrics and limited free operating cash flow. 0

-10
-20
Climate transition continues to drive capital allocation. This is the case for both cement -30
manufacturers that invest to reduce their carbon footprint, as well as light side -40
-50
companies that enlarge their product offering to meet demand for buildings' energy 2015 2016 2017 2018 2019 2020 2021 2022 2023
efficiency improvements.
Related Research
Global Building Materials Companies:
High interest rates could cause a prolonged business downturn. Further tightening Strongest To Weakest, Feb. 13, 2023
monetary policy may translate into a longer-than-anticipated downturn in residential
construction, which could weaken the credit quality of those companies more exposed to
new construction.
Shareholders might consume much of the credit buffer. Financial policy remains the
main factor in negative rating actions, and more aggressive behavior than we are
assuming would likely stress ratings. In the past month, there has been a renewed
appetite for dividend distributions in the leveraged finance space, which would likely
result in reduced rating headroom available to face the current business downturn.
Further hikes in interest rates raise refinancing risk in the 'B' rating category. While
most issuers' financial debt matures beyond 2025, refinancing at higher rates than we
currently see in the market would depress companies' operating cash flow, which could
reduce their capital allocation options and make them more vulnerable to operational
challenges, unless they decide to scale down their debt capital structure.

Capital Goods Tobias Buechler, CFA

Frankfurt
Tobias.buechler@
Secular tailwinds provide support in challenging environment spglobal.com

+49 69 33 999 136

The overall order intake declines but remains solid. Secular trends and price effects Outlook Distribution
provide a tailwind to nominal order values. Government investments, decarbonization, Negative Stable Positive
energy saving efforts from corporations, as well as automation/digitalization investments All
are providing a baseload of demand for the overall late-cycle capital goods sector. 24% 66% 10%
Investment Grade
Cost pressures remain but energy prices are down and supply chain bottlenecks ease. 25% 71% 4%
Inflation pressure remains high as supply contracts have been renewed and labor costs Speculative Grade
24% 62% 14%
increase, while energy prices have decreased substantially since the beginning of 2023.
TTF gas contracts for 2024 declined to €48/MWh over the last six months, from €77/MWh. 0% 50% 100%
Except for certain still-scarce components like electronic chips, supply chains have been
stabilizing, partly thanks to efforts to reduce dependencies by broadening the supplier
base. Improvements in the synchronization of supply chains should support the recovery Ratings Statistics (YTD)*
in profitability and reduce inventory, which supports cash flow generation.
IG SG All
Credit quality is a mixed bag. Our outlook bias turned negative on slower deleveraging Ratings 28 42 70
prospects and the expected pressure on free cash flows from higher interest costs at
Downgrades 0 2 2
highly leveraged companies. At the same time, rating actions had a positive bias in the
first half of 2023, reflecting higher revenues and successful restructuring. We also note Upgrades 2 2 4
that some companies now have a more conservative balance sheet, particularly following Ratings data as of end-Jun 2023. * Year-to-
higher M&A activity, to support their credit standing, given the higher cost of debt.

Net Outlook Bias (%) Capital Goods
Pricing power will remain a key differentiator. Inflationary pressure has peaked but 10
0
remains high, especially in Europe. This reduces margins for weakly positioned companies -10
-20
with low pricing power, while companies with strong market positions can defend or even -30
expand their margins, as long as underlying demand remains healthy. -40

-50
2015 2016 2017 2018 2019 2020 2021 2022 2023
Mid- to long-cycle businesses still facing operating challenges. Companies that have
exposure to projects with long lead times continue to experience gross margin pressure, German Industrial
given legacy contract terms. However, we expect those to grow out by the end of 2023. Production vs. Orders
Level, 3 Month Moving Average
Refinancing risk for leveraged companies remains high. Highly leveraged companies Industrial production (LHS) Orders (RHS)
might be unable to refinance without equity injections because the interest burden could 115 130
110
become unsustainable, even with a like-for-like refinancing. 105
120
110
100
100
95
What are the key risks around the baseline? 90

85
90
80
80 70
Rising rates could depress demand and earnings. For now, end market activity remains 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
solid in industrial, nonresidential construction, mining, and energy. Higher interest rates Source: Refinitiv, S&P Global Ratings
are slowing demand, with a time lag for the late-cyclical capital goods sector. Sticky core
inflation in Europe could result in higher-for-longer interest rates, which depresses Related Research
demand in the medium term.
Siemens Energy AG Downgraded To 'BBB-'
A cyclical downturn in the short term could overshadow positive secular demand. We On Withdrawal Of Profit Guidance; Outlook
Stable, July 10, 2023
have seen strong order intakes over the past 18 months, with low cancellation rates. Still,
German Materials Handling Equipment
if recessionary pressures become more pronounced due to much weaker end-consumer Maker KION Affirmed At 'BBB-' On
demand, existing orders could be cancelled and new-order intake would take a hit. Progressing Operating Recovery; Outlook
Negative, April 25, 2023

Chemicals Paulina Grabowiec

London
paulina.grabowiec@
Sluggish demand and still-high costs pressure credit quality spglobal.com

+44 207 176 7051

Industry conditions in petrochemicals and fertilizers are off peak. In fertilizers, prices Outlook Distribution
for potash and phosphate declined sharply versus the record highs seen in 2022, but Negative Stable Positive
2023-2024 prices should remain broadly above 2021 averages. In petrochemicals, a tough All
macroeconomic environment is depressing demand in several end-markets, at the time 22% 72% 6%
Investment Grade
of new capacity additions, notably in Asia. We believe this combination will lead to an
16% 79% 5%
oversupply in 2023 and 2024, which will weaken olefin and polyolefin prices, and in turn Speculative Grade
margins, cash flow, and credit metrics. 26% 69% 6%
Outlook bias is firmly negative and here to stay. Despite negative rating actions since 0% 50% 100%
the start of 2023, 22% of our portfolio remains on a negative outlook, broadly on par with
20% on Dec. 31, 2022. Most negative outlooks relate to high-yield issuers.
The challenge is to keep both the volumes and the prices. Sluggish demand and low
confidence create an environment of slowing volume growth and still-high costs, despite IG SG All
receding raw material prices. Management actions to protect margins and working capital Ratings 19 35 54
release can help credit quality, but top-line growth is key to ratings stability.
Downgrades 0 4 4
Upgrades 1 2 3
What to look out for? Ratings data as of end-Jun 2023. * Year-to-
The cost of capital is growing amid selective market access. The risk of inaccessible
financial markets is relevant particularly for lower-rated issuers with refinancing
requirements. They may have seen weaker results over the past six months or so, making Ratings Outlook Net Bias
it more difficult to address forthcoming maturities and at significantly tighter conditions. Net Outlook Bias (%) Chemicals
10
Companies face pressure from customers to lower prices. Most specialty chemical 0
issuers should be able to hold on to price gains and release them in an orderly manner as -10
-20
recovery in demand and receding cost inflation set in, but will need careful price/volume -30
mix management to protect margins and advance order books. -40

2015 2016 2017 2018 2019 2020 2021 2022 2023
Higher capital expenditure is needed to meet carbon-dioxide-reduction goals.

Petrochemicals, and fertilizers in particular, face tightening environmental regulations in
Europe, increasing carbon dioxide costs, and unavoidable investments to transition IFO Sentiment Survey for
German Chemical Industry
operations to lower carbon-dioxide intensity. Fast movers will reap the business benefits,
Chemical Industry Current Business Assessment
but not before significant capital outlays, eroding free cash flow in the interim. Chemical Industry Business Expectations
60
40

0
Continuing subdued demand with no recovery in the second half of 2023. Soft demand,
(20)
(40)
notably stemming from below-expectations recovery in China and notwithstanding low (60)
inventory levels in several chemical value chains, will weigh further on ratings. (80)
18 19 20 21 22 23
Source: Ifo Institute for Economic Research, June 2023
Geopolitical risks include the ongoing war in Ukraine, as well as further escalation of
U.S.-China tensions. The latter would cause great difficulties for global trade and
chemical supply chains, which rely on the timely and efficient flow of critical materials.
High and volatile energy costs return to Europe. The EU's natural gas inventory levels
were at 73% of capacity as of June 13, 2023, placing Europe in reasonably good shape to
restock levels for the winter. The renewal of gas supply disruptions and abrupt price
volatility would hurt European chemical producers' operating rates and weigh on
competitive positions.

Consumer Products Raam Ratnam

London
raam.ratnam@
Price increases will moderate amid tepid consumer demand spglobal.com

+44 207176 7462

Branded consumer products will see volume declines in mature markets. Higher Outlook Distribution
household bills and cost of essentials, alongside the pivot to experiences, will lead Negative Stable Positive
consumers to curtail the volume and frequency of purchases and seek cheaper All
alternatives. Emerging markets will remain a key growth avenue for multinational 13% 85% 2%
Investment Grade
consumer goods companies.
5% 89% 5%
Cost pressures have begun to alleviate. Most commodity and producer input prices have Speculative Grade
18% 82%
been reducing for a few months. Capacity in supply chains is also building up, given lower
sales volumes and order levels from retailers. 0% 50% 100%
Moderating price increases. Branded consumer product companies will begin to slow
their pricing actions in response to lower input costs and also to stem volume declines.
However, margins will still benefit from the carryover effect of price increases realized
over the second half of last year. IG SG All
Ratings 37 62 99
Working capital management will be critical. Many consumer goods companies started Upgrades 2 5 7
the year with significant inventories. Given weaker sales volumes, the ability to optimize Ratings data as of end-Jun 2023. * Year-to-
inventory levels will be a key driver of free cash generation.
Premiumization and innovation remain crucial to capturing value share. Branded Ratings Outlook Net Bias
consumer goods companies will continue to employ product premiumization and
innovation strategies to command higher prices, especially in mature European markets. Net Outlook Bias (%)
10
Consumer Products
0
Higher advertising and promotional spend. As competition intensifies, gross margin -10
gains from lower input costs and carry over pricing gains will be deployed to strengthen -20
brand equity. Consumer product companies will continue to prioritize digital channels and
-30
-40
adopt a data-driven approach to advertising and promotions. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Greater shift to private label and discount products. Branded consumer goods
A Cocktail Of Growth And Financial
companies could see a stronger decline in sales volumes as consumers become more Discipline Will Keep Most Alcoholic
price conscious and opt for cheaper alternatives, especially in sectors more exposed to Beverage Sector Ratings Steady, June 21,
2023
private-label competition, such as home care and packaged food.
Slides Published: EMEA Consumer Goods
Overview, Credit Trends, And Outlook, May
Worsening geopolitical tensions. An escalation of the Russia-Ukraine war or China-U.S. 16, 2023
tensions could weigh on global trade, commodity prices, and consumer sentiment. Personal Luxury Goods' Allure Endures As
Consumer demand in China will continue to have a meaningful impact on the operating New Challenges Beckon, March 2, 2023
performance of Europe-based multinational consumer product companies.
Speculative-grade issuers could witness credit deterioration. Companies rated in the 'B'
category or lower, with leveraged capital structures and exposure to discretionary
consumer spending, could see weakening interest coverage ratios as refinancing picks up
in the coming quarters.

Health Care Nicolas Baudouin

Paris
nicolas.baudouin@
Ongoing growth for pharma, challenges for services spglobal.com

+33 1 4420 6672

In April 2023, the European Commission announced the first overhaul of EU Outlook Distribution
pharmaceutical legislation in 20 years. The plan aims to improve market access to Negative Stable Positive
innovative medicine and proposes cutting the period of market exclusivity by two years. All
This means the competition of generic drugs could kick in after eight years from 10 years. 11% 84% 6%
Investment Grade
The industry could benefit from an extended exclusivity period if an innovative medicine is
8% 88% 4%
launched in the EU, which is currently not usual practice. Speculative Grade
12% 82% 7%
Big pharma continued to post strong results in the first quarter. Big pharma companies
also launched very positive phase III read-outs, paving the way for ongoing solid growth. 0% 50% 100%
Market conditions remain challenging for health care services. Health care companies
have the lowest margins and are most exposed to high labor costs. Although demand has
improved post-pandemic, labor costs will likely remain high pressuring EBITDA, cash
flows, and ratings in the sector. Also, staff shortages could weigh on activity volumes. IG SG All
Ratings 24 61 85
We project mid-single-digit growth for Europe's health care pharmaceutical industry, Upgrades 2 1 3
which remains largely recession resistant. Laboratory testing is the only segment facing Ratings data as of end-Jun 2023. * Year-to-
significant headwinds, especially in France where the marked decline of COVID-19 testing
is combined with decreasing tariffs.
We expect adjusted big pharma/biotech companies' EBITDA margins to remain flat. We
project a 35%-38% range with no major loss of exclusivity in Europe and no major impact Net Outlook Bias (%)
10
Healthcare
from the COVID-19 aftermath. 5

0
-5
H2 2023 will see U.S. federal program Medicare pick up 10 drugs, to be submitted for -10
price negotiation in 2026. This will be in accordance with the Inflation Reduction Act (IRA) -15
-20
announced last year, and the drugs will be self-administered at home, with 10 years of 2015 2016 2017 2018 2019 2020 2021 2022 2023
exclusivity and no generic competition. Drugs administrated by a physician (part B) will be

at stake only from 2028. We expect European groups to be slightly less affected than U.S.
players. Related Research
Sanofi, Full Analysis, Jun 06, 2023
What are the key risks around the baseline? GSK, Full Analysis, May 16, 2023
AstraZeneca, Full Analysis, Mar 22, 2023
Risks focused on health care services. We expect EU and U.S. reforms to only have long- Roche Holding, Full Analysis, Feb 17, 2023
term effects on pharmaceuticals. The main immediate risks will therefore affect the
health care services sector. Health care companies' inability to cope with staff shortages,
and to increase tariffs and streamline cost bases to mitigate rising inflation could
constrain earnings and ratings.

Homebuilders and Developers Franck Delage

Paris
franck.delage@
Declining demand will dent developers’ margins spglobal.com

+ 33 1 44 20 6778

Higher mortgage rates and inflation hamper demand for newly built residentials. Sales Outlook Distribution
are mostly paid through mortgage loans in Europe. Higher rates and inflation have Negative Stable Positive
therefore dented real estate purchasing power, significantly depressing demand. All
25% 75%
High construction costs and land scarcity still constrain supply. The number of Investment Grade
construction starts has fallen sharply in most countries, as profitability decreased. We 100%
expect developers to reconsider new launches over the next 12 months. Speculative Grade
33% 67%
Governments have shown little support to the sector so far. In contrast, some strong
0% 50% 100%
historical incentive schemes--such as the U.K.'s Help to Buy or France's PINEL--have
been halted. Also, governments are making smaller block acquisitions, although they have
previously been strong market catalysts.
IG SG All
Ratings 2 6 8
Prices and margins will be under pressure to sustain sales volumes. Lower prices will
Downgrades 0 1 1
help some developers to sell existing stock, as demand suffers, but will likely hit their
margins and debt to EBITDA. We expect prices and volumes to be significantly strained in Upgrades 0 0 0
most European countries in 2023. Ratings data as of end-Jun 2023. * Year-to-
Costs pressures may not ease materially before 2024. The cost of building materials is
progressively softening, and subcontractors will likely adjust their prices amid weaker
demand. However, the benefits will be gradual and impact developers with a time-lag.
Related Research
When Rates Rise: Softening Demand
Consolidation could take place as small developers face acute strain. Pricing pressure
Threatens European Homebuilders Amid
will likely hit small or midsize companies harder, creating potential opportunities on land Climbing Costs, Aug. 12, 2022
plots for larger and wealthier developers.

Intensifying regulatory and environmental requirements. While these are fueling
demand for new builds, they also represent additional costs, administrative hurdles, and
technical challenges for developers.
Tighter-than-expected lending conditions could dampen demand further. More-

restrictive bank conditions or higher-than-expected rate increases could cause banks to
issue even fewer mortgages and would also result in lower affordability and even fewer
housing purchases.
Margins dropping to very low levels. They could even reach negative territory in some
less protected markets as developers try to dispose of their existing stocks, eroding their
ability to service debt.

Hotels, Gaming, and Leisure

Patrick Flynn
London
patrick.flynn@
spglobal.com
European leisure demand continues, for now +44 20 7176 0053
Hina Shoeb
London
What’s changed? hina.shoeb@
spglobal.com
Average daily rates (ADRs) are likely to plateau for the remainder of 2023. After +44 20 7176 3747
consecutive second-peak summer bookings, we expect ADRs for hotels to level off, as
Rating Trends
inflation and the high cost of living begin to erode the savings of an average traveler.
Outlook Distribution
Companies are looking to amend and extend existing capital structures. We continue to
see speculative-grade companies addressing upcoming maturities and undertake Negative Stable Positive
All
interest-rate hedging to fix their interest expense.
24% 66% 10%
The U.K.'s gaming white paper has been released. Released in April 2023, the white Investment Grade
100%
paper has generally been regarded as a moderated approach. That said, key components
Speculative Grade
remain subject to further consultation and finalization. Meanwhile, large players have 26% 64% 10%
been implementing a raft of measures preemptively.
0% 50% 100%

European leisure demand looks set to continue, at least for the short term. In many
respects, demand has remained robust across the sector, perhaps in part thanks to pent- IG SG All
up demand, a strong services economy and pricing, and consumer savings buffers. We Ratings 2 39 41
flagged this possibility in our previous publication (see "Industry Top Trends: Hotels,
Downgrades 0 3 3
Gaming, and Leisure," published Jan. 23, 2023). However, it remains to be seen how long
discretionary spending on leisure can hold amid continued rate expansion. Upgrades 0 9 9
Cost inflation persists. While energy costs have reduced compared with last year's hikes, date. Current ratings only.
wage inflation continues hampering EBITDA margins.
Leverage remains high. Average leverage within the European rated leisure portfolio Ratings Outlook Net Bias
remains high, and there has been much M&A activity over recent years. Subject to Net Outlook Bias (%) Hotels, Gaming & Leisure
acquisition pricing considerations, additional debt-funded acquisitions now face a high 20
0
cost-of-capital bar to add value. -20
-40
-60
-80
What are the key risks around the baseline? -100

2015 2016 2017 2018 2019 2020 2021 2022 2023
Macroeconomic and geopolitical uncertainty. The Russia-Ukraine conflict poses a

continued unpredictable risk for leisure travelers to some European destinations.
Macroeconomic uncertainty could result in trading down on holidays, adding volatility to Related Research
the demand.
European Lodging Outlook 2023: A Window
Lower free cash flow. Our aggregate model forecasts for the sector, while diverse at Is Opening, Feb. 15, 2023
company level, show average leverage broadly unchanged in 2023 across the rated leisure Scenario Analysis: Can European Lodging
Companies Sleep Easy About Rising Rates?
portfolio. Notwithstanding this, our forecast for average free cash flow to debt is Feb. 15, 2023
comfortably lower, reflecting risk to cash flow from an inflationary environment weighing Industry Top Trends 2023: Hotels, Gaming
and Leisure 2023, Jan. 23, 2023
on costs, higher financing costs, higher investment in some cases, and slower growth.
Faster rate increases or higher terminal rates. We remain uncertain about the impact of
continued future rate increases in Europe and the potential effect on discretionary
spending. Rate hikes take time to filter through the economy, and as such, more impact
from rates may yet be felt in a demand-sensitive sector such as leisure.

Media and Entertainment Alexandra Balod

London
alexandra.balod@
Holding up to technological and macroeconomic disruption spglobal.com

+44 20 7176 3891

The economic downturn affected advertising less than feared. However, the impact will Outlook Distribution
persist for longer. A drop in real GDP growth in the eurozone, especially in Germany and Negative Stable Positive
the U.K., led to weak advertising and steeper declines in TV and print advertising revenue. All
We still expect digital advertising to expand by 7%-9% in 2023, supporting total 20% 73% 8%
Investment Grade
advertising growth, but persistent macroeconomic weakness could mute or delay a pick-
20% 80%
up in second-half 2023. In 2024, advertising revenue will recover, boosted by sports Speculative Grade
events such as the Olympics and UEFA Euro Football Championship, but will remain 20% 70% 10%
sensitive to consumer confidence and inflation.
0% 50% 100%
AI presents risks and opportunities. It is still too early to tell how AI will reshape media. It
will require hefty investments to develop and acquire technology, so smaller players that
don’t already own it or that lack capacity for M&A could miss out. Over the long term, AI Ratings Statistics (YTD)*
could enhance efficiency and reduce costs, for example, in content creation and editing.
IG SG All
Still, wider implications for the industry, including the regulation and evolution of
copyright, remain highly uncertain. Ratings 10 30 40
Downgrades 0 1 1
Live events and outdoor entertainment have bounced back. Pandemic restrictions are a
distant memory as box office revenue, live events, trade shows, and outdoor advertising Upgrades 1 4 5
have recovered strongly. Companies that the pandemic hit most are finally emerging from Ratings data as of end-Jun 2023. * Year-to-
bankruptcy and restructuring their debt.

Net Outlook Bias (%) Media
How traditional media adapts. Companies are expanding their digital distribution 20
10
0
platforms to adapt to shifts in media consumption. This weakens their profits and cash -10
-20
flows until they reach scale. So far, most European companies haven't curbed their -30
-40
-50
direct-to-consumer (DTC) and streaming plans, unlike their global peers. Some might -60
-70
succeed in local markets; others could end up overstretching. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Whether M&A will pick up. Low activity over the past two-to-three years reflected volatile
markets, high valuations, companies’ focus on recovering from the pandemic, and
regulators' pushback on a few large consolidations. Now that valuations have deflated,
Related Research
and despite costlier funding, some issuers (especially those with investment-grade InfoPro Digital Upgraded To 'B' On Strong
ratings and strong balance sheets) might pursue strategic acquisitions. Operating Performance, Refinancing;
Proposed Notes Rated 'B'; Outlook Stable,
Refinancing by highly leveraged companies. A few have refinanced their capital June 7, 2023
Tear Sheet: Universal Music Group N.V., May
structures well ahead of debt maturities, for example, Banijay Group SAS and InfoPro 30, 2023
Digital B.V. Others with maturities in 2025-2026, especially the most leveraged, remain Ad Agency Publicis Groupe Upgraded To
highly exposed to market conditions and will likely see a significantly higher cost of debt 'BBB+' On Strong Operating Performance
And Expected Low Leverage, May 5, 2023
erode their already stretched cash flows.

A sharper or longer economic downturn further squeezing consumer spending.
Advertisers could delay investments and reduce spending if persistently high inflation hits
consumer confidence, affecting second-half 2023 growth and a potential recovery in
2024. DTC distribution could also come under pressure. Continued cost inflation,
especially for staff, could hinder companies' efforts to restore margins that have already
decreased in 2023.

Metals and Mining Simon Redmond

London
simon.redmond@
Balance sheets are supportive, but cost curves are shifting spglobal.com
+44 20 7176 3683

Metal prices have dropped but remain higher than in previous downturns. Most Outlook Distribution
industrial metal prices are well below their highs of 2021 but have not moved down the Negative Stable Positive
cost curve far enough to disincentivize production. All
11% 56% 33%
Costs are squeezing profits, but cash flows are strong. Capital expenditure (capex) Investment Grade
discipline is protecting cash flows, even if some higher-cost producers are suffering as 75% 25%
operating leverage swings against them. Speculative Grade
20% 40% 40%
Credit quality has settled at a higher level. Cost inflation is a risk, even if moderated by
0% 50% 100%
currency depreciation, but prudent balance sheets and financial policies mean ratings are
generally well positioned.
What to look out for? IG SG All
Potentially lower prices if economic conditions weaken. Metal prices could take a Ratings 8 10 18
further leg down if slower Chinese growth shifts into deflation and recessionary risks
Downgrades 0 0 0
transpire for demand elsewhere.
Upgrades 0 0 0
Capex plans could grow. The energy transition implies massive investment needs to Ratings data as of end-Jun 2023. * Year-to-
supply more copper and other critical minerals with similarly large uncertainties about date. Current ratings only.
timing of demand and financial returns for miners.
Mergers and acquisitions may pick up. Several actual and proposed transactions are in Ratings Outlook Net Bias
play as companies align their strategies with market developments and expectations. Net Outlook Bias (%) Metals & Mining
40
20

0
-20
-40
-60
Looser financial policies. There is a risk that miners step-up investment significantly, -80
2015 2016 2017 2018 2019 2020 2021 2022 2023
only for prices and operating cash flow to fall further. This could erode balance sheet
strength.
Costs and developments drag on returns. Inflation has been an important and largely Related Research
manageable factor for miners and metal producers so far. Energy bills are falling back
again. These impacts are not equal, however, and returns over time significantly depend S&P Global Ratings' Metal Price
Assumptions: Market Conditions Are
on upfront development outlays.
Broadly Supportive, Jul. 17, 2023
Competitive moats break down. Markets continue to develop, thanks to the energy Industry Top Trends 2023: Metals & Mining,
transition and other factors. A company’s advantages can be lost rapidly or eroded over Jan. 23, 2023
time, not least as government policies evolve and sustainability results in conflicting
demands. The ramifications of carbon pricing and related border adjustments in Europe
are examples of structural change.

Oil and Gas Simon Redmond

London
simon.redmond@
Cash flow builds resilience, but challenges abound spglobal.com

+44 20 7176 3683

Global gas demand and prices are weaker. Prices fell substantially due to mild winter Outlook Distribution
weather leading to weak demand for gas, and high storage levels in Europe. Negative Stable Positive
All
OPEC+ and non-OPEC production. Decisive OPEC+ cuts avoided further declines in oil 13% 70% 17%
prices and restored spare capacity as non-OPEC supply meets still growing demand. Investment Grade
9% 82% 9%
Companies are adapting strategies. As government policies and demand dynamics Speculative Grade
evolve, companies are reprioritizing investments in oil and across low-carbon activities. 16% 63% 21%
0% 50% 100%

Global and national (geo)politics. Government actions and policies remain critical and Ratings Statistics (YTD)*
sometimes unpredictable factors for energy demand and supply.
IG SG All
Cost and capital expenditure inflation look manageable. Financial discipline and cost Ratings 11 19 30
control remain the watchwords for public companies, but oilfield service companies have
Downgrades 0 1 1
better prospects for passing through wage and other cost increases. While lower
commodity prices are beginning to impact North American drilling activity, longer-cycle Upgrades 0 4 4
international and offshore projects continue to move forward. Ratings data as of end-Jun 2023. * Year-to-
Shifts in gas markets. Europe's structural move away from Russian piped gas is
underpinning liquefied natural gas (LNG) demand, even as its overall gas demand
declines.
Net Outlook Bias (%) Oil & Gas
40
20

-20
-40
The Russia/Ukraine conflict. Supply concerns for both oil and gas have moderated but -60
-80
could easily flare up and lift prices. -100
2015 2016 2017 2018 2019 2020 2021 2022 2023
Oil market balances. Our baseline assumes tighter markets and stock draws in the
second half of 2023 with Brent at $85 per barrel (/bbl) and WTI at $80/bbl. Recession or
deflation risks could sap demand growth, keeping prices soft. Related Research
A loss of financial discipline. There is a risk that producers might step-up investment Clear LNG Outlook Could Turn Murky Near
significantly, only for prices and operating cash flow to fall further. This could erode the End Of Decade, June 27, 2023
balance sheet strength built up since 2021. S&P Global Ratings Lowers Hydrocarbon
Price Assumptions On Moderate Demand,
June 22, 2023
Price Assumptions, April 20, 2023

Real Estate (REITs) Franck Delage

Paris
franck.delage@
Refinancing risks increase, asset corrections materialize spglobal.com

+ 33 1 44 20 6778

The negative rating bias is higher. Of all the European real estate investment trusts Outlook Distribution
(REITs) that we rate, 25% carry either a negative outlook or are on CreditWatch negative, Negative Stable Positive
up from 18% in January 2023. We have downgraded 12 companies over the past year. All
26% 71% 3%
Refinancing risks have increased as banks tighten their conditions and large debt Investment Grade
maturities fall due. Real estate investors are finding it more difficult to attain new bank 20% 76% 4%
funding, especially those with limited bank relationships, tight covenant headroom, or few Speculative Grade
44% 56%
unencumbered assets.
0% 50% 100%
Valuations by external appraisers are adjusting, albeit slowly. We continue to assume
an average asset correction of 10% for rated European REITs, peak-to-trough, ranging
from 5% to 24%. Companies reported only a third (3.4%) during the second half of 2022.
IG SG All
Ratings 50 16 66
Early refinancing, cash preservation, and covenant headroom are key concerns. Most
Downgrades 1 3 4
companies have adequate liquidity, enabling them to cover debt maturities well beyond 12
months, but eroded cash buffers or covenant headroom could lead us to downgrade Upgrades 0 2 2
more issuers. Ratings data as of end-Jun 2023. * Year-to-
Debt-to-debt plus equity and interest coverage ratios should weaken. We estimate
asset corrections and the higher cost of debt could result in debt-to-debt plus equity Ratings Outlook Net Bias
growing by three percentage points and interest coverage ratios falling by 0.5x, on
average, between 2022 and 2025. Conversely, debt to EBITDA should improve by 1x, on Net Outlook Bias (%)
20
Real Estate
average, thanks to lower investments and steady revenue growth. 10

0
The office segment shows more vulnerabilities. The combination of slowing economic -10
growth and changing office utilization patterns will likely weaken the demand for office
-20
-30
assets, particularly non-prime, and depress valuations more than other asset classes. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Rental growth should remain robust across most property segments. Rents rise with
inflation because most leases are indexed to the consumer price index, and most costs
are passed through to them. Supply also becomes rarer as building costs increase,
Related Research
keeping vacancy low. European REITs: The Great Repricing
Continues, Jul. 18, 2023
Spotlight On Refinancing Risks In European
What are the key risks around the baseline? Commercial Real Estate, April 24, 2023
German Residential REITs Face A Mixed
Distressed asset sales could exacerbate valuation pressures. Transaction activity Outlook In 2023, Feb. 20, 2023
remains subdued and difficult to materialize in the absence of clarity on terminal rates.
However, refinancing struggles could force some asset sales at wide price discounts.
Economies contracting strongly and without a rate decrease. This would likely hamper
tenant demand and hit valuations harder than expected, as the prospect of rental growth
would no longer soften the rate impact on asset value declines.
Tighter regulation around properties' energy performance. This could require REITs to
spend more on renovation when the cost of capital is high and access to funding rarefied.

Retail and Restaurants Raam Ratnam

London
raam.ratnam@
Consumer cutbacks will test retailers’ resilience spglobal.com

+44 207176 7462

Household budgets are squeezed. While consumer spending has held up in value due to Outlook Distribution
strong pricing, volumes are declining or stagnant. Consumers burdened with higher prices Negative Stable Positive
and increased mortgage payments eating into their disposable income are looking to All
balance their spending across essentials, goods, and experiences. 14% 78% 8%
Investment Grade
Increase in price competition. After a prolonged period of passing the higher cost of 6% 94%
goods from manufacturers and suppliers through to consumers, retailers now need to Speculative Grade
17% 73% 10%
compete more aggressively on price, especially for discretionary products.
0% 50% 100%
Elevated labor costs will be a drag on margins. Unemployment rates remain
exceptionally low, and labor is in short supply. As a very labor-intensive sector, retail is
extremely exposed to further margin pressure from higher wages.
IG SG All
Ratings 16 48 64
Discounters, value, and national retailers will outperform. The current economic
Downgrades 0 6 6
conditions will lead to further expansion in discount and value formats. We expect more
retailers to extend their affordable private-label ranges, offering products at lower prices, Upgrades 1 3 4
to defend market shares and capture downtrading. Many smaller brands (especially in the Ratings data as of end-Jun 2023. * Year-to-
apparel segment) have closed operations or exited certain markets, benefiting the larger
national retailers.
Rightsizing of store footprints and higher omnichannel spending. Brick-and-mortar
retailers will see a rebound in foot traffic, while pure-play e-commerce players will suffer Net Outlook Bias (%)
0
Retail and Restaurants
from anemic sales. Retailers who are better invested in omnichannel retail--backed by -10
-20
strong digital systems and analytics--will be better positioned to deal with ongoing -30
channel shifts driven by changes in consumers’ shopping preferences.

-40
-50
-60
Inventory cycle and working capital. Many nonfood retailers in segments such as DIY, 2015 2016 2017 2018 2019 2020 2021 2022 2023
household goods, and apparel still have elevated inventories due to a combination of
advance orders and weaker volumes. Cash flows and credit metrics will, to a large extent,
depend on the ability of these retailers to convert the excess stock to cash, without Related Research
significant promotions or discounting.
Scenario Analysis: Higher Rates Threaten
The Credit Quality Of 13 EMEA Retail And
Restaurant Companies, Feb. 28, 2023
Affordability risks rising on the back of a harsher recession. Ongoing cost of living
pressures, and the delayed effect of rate rises on household mortgages, could lead to a
sharp drop in retail sales.
Financing conditions have sharply deteriorated. Rising interest rates and weakening
profitability will make it tougher for many highly leveraged companies rated in the 'B'
category or below (accounting for more than half of the retail and restaurant companies
that we rate) to access funds for investing in their operations or needing to refinance.
Geopolitical shocks. Additional geopolitical turmoil could aggravate weaknesses in the

global economy and financial markets, raise prices and transportation costs, and further
hit consumer confidence and reduce their spending power.

Telecommunications Mark Habib

Paris
mark.habib@
Solid outlook, but caution on structural M&A changes spglobal.com

+33 1 4420 6736

Inflation focus shifts to labor costs. Energy costs, a significant concern in 2022, have Outlook Distribution
moderated. Labor inflation is arriving with a lag and is likely to linger, with little prospect Negative Stable Positive
for the reversal we have seen with energy. We estimate that every 5% increase in labor All
costs will cut EBITDA margins by 1%. However, efficiency programs and margins generally 12% 74% 14%
Investment Grade
around 35%-40% mean we see little credit risk.
12% 71% 18%
Higher funding costs may constrain challengers and support pricing. Cheap debt helped Speculative Grade
12% 76% 12%
fuel aggressive, low-cost challengers across Europe, stoking competition and stalling
revenue growth for a decade. At current interest rates, leveraged challengers will need to 0% 50% 100%
improve underlying cash flow and balance sheets. This should ease price competition,
supporting our forecast for 1%-2% annual revenue growth through 2025.
IG SG All
Tower and fiber infrastructure spin-offs should continue as issuers try to monetize
Ratings 17 33 50
tower assets and push fiber builds off-balance sheet. This may culminate in the long-
pursued split of Telecom Italia's fixed-line network. In this case, we will monitor if more Downgrades 1 5 6
follow, and if national fiber networks shift toward the tower company model to become Upgrades 1 0 1
independent wholesalers. In the short term, we don't think operators (particularly Ratings data as of end-Jun 2023. * Year-to-
incumbents) want to sell these differentiating "crown jewels." But in the long term, date. Current ratings only.
operators may need to realize the full valuation of such assets to justify keeping them.
The European Commission should rule on in-market consolidation for Spain in Ratings Outlook Net Bias
September (Orange-MasMovil) and the U.K.'s Competition and Markets Authority Net Outlook Bias (%) Telecommunication Services
should do the same in 2024 (Vodafone-Three UK). However, we are conservative on 20

15
10
approval prospects. Outcome-based regulators may favor consumer affordability in their 5
0
considerations, especially given broader inflation concerns. And despite weak returns, -5
-10
-15
operators continue to invest heavily in networks. We forecast capital expenditure -20
-25
intensity remaining high (though below the 2022 peak), at 18% of revenue until 2025. 2015 2016 2017 2018 2019 2020 2021 2022 2023
Regulators may not see need for consolidation or believe it too risky for consumers.
Benefits from inflation-linked pricing likely to tail off. In-contract CPI+ indexation has
spread from the U.K., largely to other markets where U.K. players operate. If inflation is
Related Research
curbed, we still see tailwinds from the shift to annual, albeit smaller, price rises. While Industry Top Trends 2023:
competition remains moderated, we believe this will help telecoms expand revenue more Telecommunications, Jan. 23, 2023
sustainably. Credit FAQ: Telecom Tower Operators Show
Their Mettle, Jan. 18, 2023

Inflation. If higher-than-expected inflation embeds itself into telecom cost structures, it
could hamper efficiency programs. Instead of our base-case forecast for an average 1%
per year EBITDA margin growth until 2025, improvements could stall or reverse, risking
EBITDA contraction and credit ratio deterioration.
A deeper economic contraction could rekindle competition. If customers are pinched by

a weaker-than-expected economy, demand may become more elastic, incentivizing price
competition to attract and retain consumers and drive spending cuts among enterprise
clients.

Transportation Infrastructure Gonzalo Cantabrana

Madrid
gonzalo.cantabrana@
Rising financing costs and inflation test ratings' resilience spglobal.com

+ 34 91 389 6955

Strong mobility expected for the summer. We expect a solid summer holiday season in Outlook Distribution
Europe, leading to high demand for transportation through airports, railways, and roads. Negative Stable Positive
Robust labor markets, the effects of fiscal measures, and the prospect of further rate All
rises lead us to amend our European GDP growth forecast for 2023 to 0.6% from 0.3%. 20% 71% 8%
Investment Grade
Passenger transportation is also supported by attractive pricing initiatives to favor rail
18% 82%
travel and by airlines' deployment of capacity. Speculative Grade
27% 47% 27%
High inflation still looms. Managing the impact of high inflation on costs and wages will
remain fundamental for infrastructure companies’ profitability throughout 2023. Although 0% 50% 100%
disinflation should start to gain pace, we don't see inflation returning to the central bank's
2% target until 2025. In 2023, eurozone inflation could reach 5.8% and for the U.K., 7.0%,
from about 2.0% before the Russia-Ukraine conflict started. Ratings Statistics (YTD)*
IG SG All
Comparisons with 2019 provide limited insight. While traces of the COVID-19 pandemic Downgrades 0 1 1
on mobility are slowly dissipating, for some transportation assets it has not yet fully Upgrades 2 3 5
recovered, highlighting structural changes that remind us we are no longer in 2019. For Ratings data as of end-Jun 2023. * Year-to-
example, issuers face a much higher cost of funding and accumulated debt. Furthermore, date. Current ratings only and only issuer-
level ratings shown.
high inflation and changes in demand--for example due to lower commuting traffic
because of working from home or less business travel--mean issuers' expense structures
or margins have changed. Ratings Outlook Net Bias
The ability to pass through real-cost inflation remains key. Depending on the regulatory Net Outlook Bias (%) Europe - Transport Infrastructure
20
framework for each asset class and country, the ability to pass through real-cost inflation 0
in a timely manner via higher tariffs will determine each company's resilience against -20
-40
inflationary pressures. A strong competitive position to support higher prices without -60
sacrificing volumes will be vital to sustain credit quality. Social pressure may lead -80
15 16 17 18 19 20 21 22 23
governments to mitigate tariff increases on toll roads, despite their generally solid
contractual framework.
Related Research
What are the key risks around the baseline? European Air Travel Defies Economic
Pressures On Robust Demand, June 7, 2023
Economic prospects could bite mobility post-summer. The risks to our economic U.K. Purpose-Built Student Accommodation
Can Ride Out Risks, June 6, 2023
outlook have not changed much since March, and downside risks prevail. Lower
EU's Proposed Energy Market Redesign
disposable income could limit mobility after the summer. The rising cost of living could Mitigates Merchant Risks And Accelerates
deter travel and passenger transport, and weaker consumption and imports and exports Renewables, April 3, 2023
may hit the freight industry.
Higher expenses could add pressure onto credit metrics. Infrastructure companies
should be resilient to higher financing costs, particularly those at investment-grade. The
transport companies we rate are mostly financed through fixed-rate or hedged debt, and
generally have distributed maturity profiles. Both features should mitigate companies'
exposure to higher financing costs but will eventually affect their credit metrics. We
expect prudent risk management from the rated companies to anticipate this situation
well in advance.

Transportation Rachel Gerrish

London
rachel.gerrish@
Air travel recovers, container freight rates plunge spglobal.com

+44 7990 561489

We upgraded our five highest rated European airlines. Total European air traffic volumes Outlook Distribution
continue to recover to near pre-pandemic levels despite economic pressures. Ticket Negative Stable Positive
prices will likely stay elevated to offset the inflation-induced rise in airlines' cost-bases, All
primarily fuel and labor, as well as tightening carbon costs, and as capacity remains 10% 82% 8%
Investment Grade
squeezed. Consumers are still prioritizing services, such as travel, over goods, despite
13% 88%
swiftly eroding disposable incomes. Air cargo demand has slumped and rates have fallen, Speculative Grade
although they remain significantly above pre-pandemic levels. 9% 78% 13%
Freight rates have mostly normalized. Freight rates have plunged from all-time highs 0% 50% 100%
though Transatlantic routes are faring much better than Transpacific, and Asia-Europe
routes. The key pandemic trends--shortages of capacity, port congestion and strong
demand--have receded. Nevertheless, our rated container liners have built up significant Ratings Statistics (YTD)*
cash buffers to withstand further weakening in market conditions.
IG SG All
Financing conditions have sharply deteriorated. Rising interest rates will significantly Ratings 16 23 39
push up costs for lower-rated companies needing to refinance in short order.
Downgrades 0 0 0
Upgrades 2 7 9
What to look out for? Ratings data as of end-Jun 2023. * Year-to-
Soft spots in airline bookings. We are yet to uncover any weakness in booking trends,
despite squeezed consumer disposable incomes. Although bookings for summer 2023
appear robust, it is unclear whether demand can be sustained at the currently high Ratings Outlook Net Bias
pricing levels into 2024 and beyond. Revenue visibility is typically low; most air travel Net Outlook Bias (%) Transportation
bookings are made within about four months of travel. 5

-5
-15
Acceleration of the energy transition. For airlines, the EU's decarbonization roadmap, Fit -25
-35
for 55, will introduce minimum sustainable aviation fuel requirements for planes -45
-55
departing European airports by 2025 and end free carbon allowances under the EU's -65
2015 2016 2017 2018 2019 2020 2021 2022 2023
Emissions Trading System (EU ETS) by 2026. We think the region's stronger carriers
should be able to pass most of these costs on to travelers. The shipping industry will be
gradually phased into the EU ETS over the three-year period from 2024.
Related Research
Energy price volatility. The Russia-Ukraine war spurred a surge in oil prices and in the
European Air Travel Defies Economic
crack spread of jet fuel, which have since fallen but remain elevated and highly volatile.
Pressures On Robust Demand, June 6, 2023
Europe's Airlines To Bear Highest Carbon
Costs, April 3, 2023
What are the key risks around the baseline? Global Shipping 2023: Containerships And
Tankers Part Ways, Feb. 7, 2023
Economic growth remains vulnerable. Financial market volatility, sticky inflation, or an
escalation of the Russia-Ukraine war could cause a recession.
Labor shortages. Unemployment rates remain exceptionally low, and labor is in short
supply. The aviation industry has taken measures to avoid a repeat of the staff shortages
that impaired operations in 2022, but some delays could still hinder the summer peak.
Further geopolitical shocks. Additional geopolitical turmoil could aggravate weaknesses

in the global economy and financial markets, raise oil prices and transportation costs, and
further reduce consumer spending power and demand.

Utilities Emmanuel Dubois-Pelerin

Paris
emmanuel.dubois-pelerin@
Electricity and gas continue to flow, but at a price spglobal.com

+33 1 4420 6673

Sector volatility persists, but with less intensity. Europe continues to lack a gas cushion Outlook Distribution
despite demand falling by close to 20% over 2021-2023, and for electricity by almost 10%. Negative Stable Positive
Prices, though significantly down from 2022, remain high and volatile at around €35 per All
megawatt hour (/MWh) for gas and €100/MWh for electricity. 20% 73% 8%
Investment Grade
High inflation and increasing interest rates have deep credit implications. Inflation 19% 73% 8%
strains capital expenditure (capex) budgets, raises operating expenditure (opex), and Speculative Grade
24% 70% 5%
augments inflation-linked debt. Interest rates will gradually deplete funds from
operations and discretionary cash flows (DCF). Positively, regulatory asset values are 0% 50% 100%
inflation-linked for most networks in protective regulatory frameworks, supporting
remuneration.
The sector is more risky but resilient. Ratings across the region have held steady, and we
expect to take more positive than negative rating actions in 2023. Ratings will cluster IG SG All
within the 'BBB' to low 'A' range as not many companies aim higher. Ratings 175 37 212
Downgrades 0 0 0
High and volatile prices until 2024. Accelerating the buildup of renewable energy faces Ratings data as of end-Jun 2023. * Year-to-
date. Current ratings only and only issuer-
challenges while thermal and nuclear production continues to be phased out. The gas level ratings shown.
bridge needed for the energy transition remains costly, though much less than in 2022.
Ever-higher investment needs. The shift to renewables requires massive capex for Ratings Outlook Net Bias
generators and power networks, somewhat weakening generally solid balance sheets,
Net Outlook Bias EMEA Utilities
with de-risked portfolios and typically good access to senior and hybrid debt. 0
-5
Ratings headroom and firepower capacity. Some companies have rebuilt rating -10
headroom, which should support investment and credit resilience as they transition to -15
cleaner energy, unless shareholder remuneration grows. -20

15 16 17 18 19 20 21 22 23

Further pressures from interest rates and inflation. These may push up the costs
Related Research
relating to operating expenditure, capex, senior and hybrid refinancing in a fairly Europe's Utilities Face A Power Price Cliff
leveraged and DCF-negative sector. This is particularly true for speculative-grade utilities, From 2026, June 22, 2023
notably in Eastern Europe. Operating underperformance or aggressive financial policy or High Level Of Index-Linked Debt
Exacerbates Effect Of Inflation On U.K.
governance may challenge individual companies, potentially eroding market confidence. Water Companies, Dec. 1, 2022
EU's Proposed Energy Market Redesign
Persistence of political and macroeconomic risks. The geopolitical situation remains Mitigates Merchant Risks And Accelerates
fluid. Energy-short Europe remains vulnerable to price spikes. Affordability and quality of Renewables, April 3, 2023
service--for example, for U.K. water--remain rating drivers. We expect governments to Latest Infrastructure And Energy Insights
Focus On Inflation, Affordability, And Tight
keep supporting energy-derivative market participants' liquidity, but also to curb LNG Markets, Jan. 25, 2023
extraordinary profits. Significant uncertainties linger around the expected ramp up in
demand for gas and power from late 2023.
Key risks in executing the energy transition remain. Site permitting and grid access
granting remain slow despite the EU and national governments pushing for faster
approvals. Supply chains remain vulnerable both within and outside Europe and depend
considerably on China.

Industry Top Trends Update | Asia-Pacific
Autos Claire Yuan

Hong Kong
+852-2533-3542
Demand uncertainty and pricing pressure to persist claire.yuan@spglobal.com
What do we expect over the next 12 months? Rating Metrics

Volume growth, lower raw material costs, and improving operating efficiency will FFO to debt
underpin stable credit profiles for most rated Asia-Pacific auto companies. (median, adjusted)
Global Asia-Pacific
Our net rating outlook bias turned less negative. However, this follows the stabilization 60%
of the outlook after one rating downgrade as margins are likely to be weaker than we had
40%
anticipated.
20%
Rating headroom could tighten if price competition intensifies, or demand turns sour.
Additionally, carmakers continue to see margin dilution risk from rising electric vehicle 0%
sales. 2022a 2023f 2024f
What are the key risks around the baseline? Debt to EBITDA
(median, adjusted)
Macro hurdles. While the economic recovery in China bodes well for consumption, it
takes time for consumer sentiment to improve and equate to the purchase of big-ticket Global Asia-Pacific
2.5x
items. In the U.S. and Europe, sticky inflation and rates hikes are dampening consumers' 2.0x
purchasing power. 1.5x
1.0x
Price competition. Price competition started in China at the start of the year and
0.5x
extended from electric vehicles (EVs) to internal-combustion-engine models, on the back
0.0x
of weaker demand growth and the need to destock older-emission standard inventory. In 2022a 2023f 2024f
Europe and U.S, Tesla's price cut, alongside weakening order books and affordability, is
also exerting modest pricing pressure. Source: S&P Global Ratings.
All figures are converted into U.S. dollars
using historical exchange rates. Forecasts
are converted at the last financial year-end
What do they mean for the sector? spot rate. FFO--Funds from operations. a--
Actual. f--Forecast.
Soft demand outlook. Light vehicle sales (excluding export) in China fell by 2.5% in Jan. to
Apr., lagging our full-year assumption of 1% growth. While sales momentum is likely to
improve in the following quarters, risk is more on the downside after the withdrawal of
government stimulus. In the U.S. and Europe, easing supply-side constraints and the
release of pent-up demand led to strong sales in the first quarter. However, the positive
trend could falter in the second half as high vehicle prices and higher interest rates hurt
affordability.
Margin pressure. Our current base case factors in moderate revenue growth and modest
margin improvement for rated Asia-Pacific carmakers in 2023. This reflects diminishing
supply chain disruption, higher sales volume, lower raw material costs, and improving
operating efficiency. Yet, pricing competition, rising sales of the lower-margin EVs, and a
recent rebound in lithium prices add uncertainty to margin recovery. Carmakers that
move fast in electrification will feel more pain in the next 2-3 years, while those that are
trailing see the risk of weakening market position over the next 5-10 years.

Building Materials Crystal Wong

Hong Kong
+852-2533-3504
Asia-Pacific producers brace for market volatility

crystal.wong@spglobal.com

The satisfactory market position and sufficient financial buffer of most rated Asia- FFO to debt
Pacific building material companies will help them weather demand and profitability (median, adjusted)
uncertainty, steadying their creditworthiness. Global Asia-Pacific
40%
Chinese producers may only benefit from a mild recovery in demand and financial 30%
performance as we continue to expect an L-shaped recovery for the property sector in 20%
the second half of 2023.
10%
Korean producers' operating performance faces a test as construction companies turn 0%
more selective in project starts, and persistent weak housing market sentiment amid 2022a 2023f 2024f
rising interest rates. The Australian market will remain healthy, with a strong pipeline in
the residential sector as growth in net overseas migration supports housing demand and
public sector investment improves. Debt to EBITDA
(median, adjusted)
Global Asia-Pacific
What are the key risks around the baseline? 4.0x
3.0x
Subdued recovery in Chinese property market and rising interest rates outside of
2.0x
China. We may see a turnaround in China's property crisis in the second half of 2023. But
1.0x
the still weak new construction activities could limit uptick in demand for building
0.0x
materials. While China's year-on-year infrastructure investment growth in Jan.-Apr. has 2022a 2023f 2024f
been supportive, local governments' debt control post-pandemic could constrain further
acceleration. Outside China, higher interest rates could weaken housing market Source: S&P Global Ratings.
sentiment. All figures are converted into U.S. dollars
Elevated input cost and supply-chain constraints. This includes still high fuel prices are converted at the last financial year-end
spot rate. FFO--Funds from operations. a--
(mainly coal) and power costs, stemming from supply constraints, geopolitical risks, and Actual. f--Forecast.
higher labor costs. Australian producers could also face raw material shortages due to a
supply-chain bottleneck caused by extreme weather.
What do they mean for the sector?

Demand pressure. Subdued economic growth and fewer property launches in China
could continue to hit construction activities and thus the demand for building materials.
Supply-chain constraints for the rest of the region could cause construction delays and
limit demand growth for building materials.
Margin squeeze. Still-high raw material and fuel prices are likely to squeeze building
material companies' profitability. Managing costs through operational efficiencies and
execution of price increases are key to mitigating input cost inflation. Chinese players
could still have a weaker cost pass-through than peers in the rest of the region before
demand recovery and ease of oversupply.

Capital Goods Makiko Yoshimura

Tokyo
+81-3-4550-8368
Demand and cash flow outlook mixed

makiko.yoshimura
@spglobal.com

We expect the outlook on earnings in Asia-Pacific may be less robust if economic FFO to debt
activities weaken faster and deeper than we assume. (median, adjusted)
Global Asia-Pacific
Key risks include slowdowns in capital spending by corporate customers and weak 25%
ability to pass on costs. 20%
15%
Demand outlook and the degree of margin protection, as well as cash flow management, 10%
will be key drivers of credit quality. 5%
0%
2022a 2023f 2024f
Prospects of earnings recovery in China and outside may not be strong. The reopening
in China bodes well for the recovery of China's corporate sector, enabling a turnaround in Debt to EBITDA
(median, adjusted)
earnings for Chinese capital goods companies. Companies outside of China, such as in
Japan, are also exposed to U.S. and European economies, where recession concerns have Global Asia-Pacific
4x
eased. However, if the overall economy slows more sharply than we now assume, we
3x
should anticipate that weaker customer demand (especially the semiconductor and U.S.
2x
residential sectors) will mean slower capex investments.
1x
Cost pass-through continues to be challenging. Cost pressure is easing. However, if 0x
demand from customers softens before capital goods companies can fully pass on 2022a 2023f 2024f
increased costs, their profit growth will suffer.
Source: S&P Global Ratings.
High spending but weaker cash flow. Capital goods companies' own capex and spending All figures are converted into U.S. dollars
for shareholder returns are likely to increase. But inflation or a weaker macroeconomy will using historical exchange rates. Forecasts
erode EBITDA and cash flow, potentially hurting credit metrics. spot rate. FFO--Funds from operations. a--

Margin erosion. Fierce price competition will likely prevent capital goods companies in
Asia-Pacific from passing on most of their cost increases to customers. A lower ability to
pass on costs, together with weaker demand and sales, will cause a fall in profitability.
Cash flow management. Given our continued expectations of weaker economic

conditions, we assume capital goods companies will tighten working capital management
and control discretionary spending, such that the industry's ratio of debt to EBITDA would
improve in 2023. However, if a recession is deeper, or a recovery in China poses a burden
to working capital, the ratio may remain at 2022 level.

Chemicals Raymond Hsu, CFA

Taipei
+886-2-2175-6827
The demand boost from China's reopening could disappoint

raymond.hsu
@spglobal.com

A slower economic recovery in China could dampen demand growth for the rest of the FFO to debt
year. (median, adjusted)
Global Asia-Pacific
Tepid demand could lag supply growth and limit the recovery in product spreads, 30%
keeping the profitability of Asia-Pacific chemical companies subdued in 2023. 20%
10%
Debt leverage could rise more than the current expectation if the slump in profitability
0%
extends beyond 2023. 2022a 2023f 2024f

Debt to EBITDA
Weaker chemical demand. A slower economic recovery in China together with weak (median, adjusted)
exports could keep demand lagging behind supply growth.
Global Asia-Pacific
4.0x
Weaker ability to pass through costs. Weaker demand could hurt the ability of
commodity chemical companies to pass-through product costs if competition from low- 2.0x
cost producers suppresses Asian chemical companies' pricing power.

0.0x
Rising debt. Weaker profitability and continued capital spending will increase debt, 2022a 2023f 2024f
further raising debt leverage from 2023.

What do they mean for the sector? are converted at the last financial year-end
Weaker-than-expected profitability. Chemical companies' profitability in 2023 is likely to Actual. f--Forecast.
stabilize at a level below the average of past cycles.
Manageable debt leverage. Rated entities' debt leverage is likely to remain within rating
triggers in 2023, despite higher debt.
Elevated downside risk. Credit outlook could turn slightly negative, with a higher chance
that weak profitability could stay for longer and worsen the debt leverage of commodity
chemical companies more than we assume over the next 12-24 months.

Consumer Products Ryohei Yoshida

Tokyo
+81-3-4550-8660
Modest recovery in performance ahead

ryohei.yoshida
@spglobal.com

Recovery in mobility in the region will support consumption, mitigating negative effects FFO to debt
of subdued real income. (median, adjusted)
Global Asia-Pacific
Pressure on profitability moderates thanks to ongoing markup efforts by consumer 50%
goods companies and lower inflation of input cost. 40%
30%
Prudent financial policies will support credit profiles of consumer-product companies. 20%
10%
What are the key risks around the baseline? 0%

2022a 2023f 2024f
Price competition intensifies. This means further margin compression given inflationary
conditions. Where higher prices do pass through, this could benefit private-label brands--
as consumers trade down to cheaper, no-brand goods. Debt to EBITDA
(median, adjusted)
Missteps in brand investments. New product development and marketing remain key to
Global Asia-Pacific
maintaining and improving profitability. Companies face uncertainties in such 4x
investments due to fast-changing consumer behavior. Any missteps could result in a 3x

deterioration in profitability and a loss of market share. 2x
Souring financing conditions. Growing refinancing costs from unfavorable exchange 1x
rates and higher interest rates weigh on companies with a highly leveraged capital 0x
2022a 2023f 2024f
structure.
What do they mean for the sector? All figures are converted into U.S. dollars
Brand equity matters. Ability to pass on higher costs hinges on differentiated value spot rate. FFO--Funds from operations. a--
propositions of each company, enabling them to protect profitability amid intensified Actual. f--Forecast.
price competition and elevated input costs.
Bifurcation in performance. Companies that fail to offer superior value amid shifting
consumer preferences carry higher risks of price competition, meaning lower
performance.
Slower debt growth. Higher funding costs urge highly leveraged companies to adopt
prudent financial policies. Tough economic conditions also encourage companies to focus
more on their core businesses than large M&A transactions.

Gaming Aras Poon

Hong Kong
+852-2532-8069
Better prospects of a revenue recovery across the region

aras.poon@spglobal.com

Gaming revenue in most Asian markets should largely recover to pre-pandemic levels in FFO to debt
2023 and may surpass it in 2024. (median, adjusted)
Global Asia-Pacific
A stronger-than-expected Macao recovery should help operators to deliver faster 20%
improvement in cash flows and more rapid deleveraging. 15%
Regulatory risks persist across Asia. 10%
5%

2022a 2023f 2024f
Diminishing rating downside risks for most of our rated issuers. Quick recovery in
visitation and gaming revenue across major Asian gaming markets, including Macao,
Malaysia, and Singapore, should support operators in restoring cash flow and credit Debt to EBITDA
(median, adjusted)
metrics over the next 12-24 months.
Global Asia-Pacific
Regulatory changes and pressures. Increased regulations across the region to address 6x
5x
social risks in gaming could cause volatility in gaming revenue and profitability. This is a
4x
risk for casino resorts operators in Macao and Singapore, as well as the gaming machine 3x
business in Japan. 2x
1x
Growing refinancing costs from higher interest rates. These will test companies' 0x
management of capital structures and alter their refinancing decision. 2022a 2023f 2024f

What do they mean for the sector? All figures are converted into U.S. dollars
Upward revision for Macao. We recently revised negative outlooks to: positive for Las spot rate. FFO--Funds from operations. a--
Vegas Sands and Wynn Resorts; and stable for Melco Resorts, Studio City, and MGM Actual. f--Forecast.
Resorts. Our updated base case forecast should allow operators to restore their credit
metrics to closer to 2019 levels by 2025.
NagaCorp Ltd. placed on CreditWatch Negative over mounting refinancing risk. Its
US$472 million senior unsecured notes mature in July 2024. Operational missteps may
result in inadequate cash accumulation to meet the maturity, though we believe the
company has the potential to address the upcoming payment.
Development projects, depending on their timing, could slow the pace of deleveraging.
Global operators like Las Vegas Sands, Wynn Resorts, MGM Resorts, and Genting Bhd. all
have resorts development plan or interests in U.S. or other regional markets (like
Singapore, Japan etc.). In Macao, investment commitment under the new concession is
high but manageable, given the quick recovery in gaming revenue.

Media And Entertainment Clifford Kurz, CFA

Hong Kong
+852-2533-3534
China's social media platforms could benefit from winter thaw

clifford.kurz@spglobal.com

China's reopening could benefit Chinese ad-driven online media platforms. Advertising FFO to debt
spending could pick up as offline retailers and restaurants experience a rebound in sales. (median, adjusted)
Global
Rising interest rates and slowing growth remain key concerns for the region. Slower 15%
economic activity could inhibit consumers, and, therefore, advertising spending.
10%
Most Asia-Pacific media and entertainment companies have sufficient financial buffer
5%
to withstand an economic slowdown.
0%
2022a 2023f 2024f
Rising interest rates and global economic slowdown could weigh on consumption
recovery. Though consumer and advertising activity picked up in China during the first Debt to EBITDA
(median, adjusted)
two months of 2023, challenging macro conditions globally could still constrain the
consumption recovery. This could hit internet companies that have resumed investment 5x Global
spending in anticipation of better growth, after cutting costs in 2022. 4x

3x
Intense competition could squeeze margins and cash flows. Internet companies across 2x
Asia-Pacific face intense competition from existing and newer entrants. In China, short- 1x
form video platforms are entering into segments long dominated by incumbents such as 0x
e-commerce, food delivery, and games. In other regions, competition for the nascent 2022a 2023f 2024f
businesses remains stiff, for example e-commerce in Southeast Asia.

What do they mean for the sector? using historical exchange rates. Forecasts
Advertising-driven social media platforms to experience a stronger recovery in 2023. Actual. f--Forecast.
Online social media companies should benefit the most from a recovery in advertising
spending, following a decline in non-e-commerce advertising spending last year. E-
commerce advertising revenues fared better last year, as consumers diverted spending
online given sporadic COVID-related restrictions across China.
Most Asia-Pacific companies within the sector have sufficient financial buffers. Most
of our rated media and entertainment issuers are net cash or have large financial buffers
to withstand slowing economic growth and rising interest and inflation. A small minority
will benefit from the lifting of lockdown measures across Asia-Pacific countries and
recovery of outdoor activities.

Metals and Mining Annie Ao

Hong Kong
+852-9223-3619
China demand recovery remains soft and gradual

annie.ao@spglobal.com

China's demand recovery will gradually pick up in the second half of this year; the FFO to debt
weaker growth in the U.S. and Europe may partially offset the positive impact. (median, adjusted)
Global Asia-Pacific
Supply tightness or the shortage of some commodities may provide price support for 50%
some base metals. Supply rigidity may result from the Russia-Ukraine conflict, lack of 40%
project development in the previous years, export bans, extreme weather, or ESG 30%
matters. 20%
10%
Geopolitical risks, China's recovery path, and additional supply-disruptions will 0%
exacerbate the volatility in commodity markets. 2022a 2023f 2024f
(median, adjusted)
Economic pressure looms. Our current base-case price assumptions assume a mild
recession, but risks to a harsher downside persist. The U.S. and Europe could experience Global Asia-Pacific
3.0x
heavier GDP contractions. China's property sector continues to weigh on the economic
growth and the demand for some metals. 2.0x
Geopolitical risks escalate. That, and how they unfold, further limit price visibility. 1.0x
Lower prices and inflationary pressure erode margins. Margins and cash flow are 0.0x
2022a 2023f 2024f
dropping as prices moderate and costs rise. Some issuers continue to distribute trailing
dividends to shareholders. Therefore, we expect weaker profits and lower cash holdings
to consume some credit buffer. All figures are converted into U.S. dollars
Credit quality is generally good in the sector, but credit buffers could narrow. The
credit quality for many issuers in metals and mining has been improving with greater
capital discipline and lower debt in the past two years. Most issuers can withstand further
price pressure before testing our downside credit threshold.
Margin erosion as cost structure remains pressured by key input costs such as energy,
labor, and logistics.
Earnings visibility unclear amid high volatility in prices for commodities and energy.
This is the result of different catalysts, including economic uncertainty, currency swings
and geopolitical risks.

Oil and Gas Pauline Tang

Singapore
+65-6239-6390
Supportive hydrocarbon prices to continue in 2023

pauline.tang
@spglobal.com

We expect demand from China to provide some boost in oil prices from the second half FFO to debt
of 2023; however, slower-than-anticipated demand recovery could dampen outlook in the (median, adjusted)
short term. Global Asia-Pacific
80%
Brent oil prices will likely average US$85 per barrel in 2023, and US$80 per barrel in 60%
2024. Reduced supply due to the OPEC+ production cut of 2 mil. barrels per day will be 40%
fulfilled by non-OPEC+ (ex. Russia). But uncertainty premia could cause an unexpected
20%
and abrupt spike in energy prices despite ample supply.
0%
Subsiding geopolitical premiums and decreasing regulatory risks. Investment in 2022a 2023f 2024f
decarbonization and alternative energy projects could drive spending in the next two to
three years.
Debt to EBITDA
(median, adjusted)
What are the key risks around the baseline? Global Asia-Pacific
2.0x
Mixed signals in demand growth. Slow growth momentum in the U.S. and Europe could
1.5x
cap summer consumption demand. Demand from Asia-Pacific, particularly China, will be
1.0x
crucial in supporting oil prices for the rest of 2023. Nevertheless, a rebound in Asian
consumption post-reopening seems slower than previously anticipated, adding to some 0.5x
short-term uncertainties. 0.0x

2022a 2023f 2024f
Mild supply risks. Product cuts from OPEC+ and Saudi Arabia have marginally propped up
oil prices, but the impact is unlikely to last, given supply from non-OPEC+ will fill in the Source: S&P Global Ratings.
gap. Russian oil exports remain resilient but uncertainties are rising. Any unexpected using historical exchange rates. Forecasts
changes in the global supply situation could result in large and abrupt changes in energy are converted at the last financial year-end
prices. Uncertainty premia remain an upside risk over the foreseeable period. Actual. f--Forecast.
Pressure on climate-related investment. Rated oil and gas companies in Asia-Pacific are
considering various initiatives from renewable projects to hydrogen projects following
energy price spikes in 2022 that increased urgency to invest in alternative energy. While
regulatory risks have subsided, some rated companies may face working capital buildups
as governments are yet to catch up with the funding of their oil subsidy programs.

Industry is cautious on demand-supply prospects. Demand disruption caused by a
subdued macroeconomic outlook could affect earnings. Uncertainty premia, while
positive to earnings, could lead to large swings in producers' inventory gains and losses.
Rising interest rates will likely cause the industry to curtail its spending. Balancing
investment needs and maintaining prudent financial policy will be crucial amid volatilities
and strained earnings over the next 12 months.

Real Estate Development Edward Chan

Hong Kong
+852-2533-3539
Sales divergence between upper and lower-tier cities in China

edward.chan
@spglobal.com

Sales weaknesses in China's lower-tier cities will keep the property recovery on an L- FFO to debt
shaped path. (median, adjusted)
Global Asia-Pacific
Hong Kong's home prices will not fully recover their 2022 losses in 2023 due to high 15%
inventory and supply.
10%
Indonesia developers may face constrained offshore funding conditions and higher cost.
5%

2022a 2023f 2024f
Oversupply will constrain prices in China's lower-tier cities. Despite stabilizing sales in
higher-tier cities, nationwide sales will still drop by 3%-5% in 2023 due to price pressure in
lower-tier cities. Inventory level for lower-tier cities stood at 22 months as of February. Debt to EBITDA
(median, adjusted)
This compares with a normal level of about 10 months.
Global Asia-Pacific
High inventory levels will limit the magnitude of Hong Kong's home price recovery. 6x
5x
Inventory of primary homes are high after a sluggish 2022. This, coupled with a potential
4x
spike in new residential supply in 2024, will cause developers to price their new projects 3x
conservatively. 2x
1x
Indonesia's residential sales are likely to contract by about 5% in 2023. This compares 0x
with about 5% growth in 2022. The lack of new policy incentives and elevated inflation will 2022a 2023f 2024f
constrain consumer sentiment.

What do they mean for the sector? are converted at the last financial year-end
We estimate sales will drop by 10% in 2023 in China's lower-tier cities. Developers with Actual. f--Forecast.
tight rating headroom and/or significant exposure to lower-tier cities could face downside
rating risk. That said, higher-rated developers may benefit from a flight to quality among
homebuyers even in lower-tier cities.
If demand is weaker than expected in Hong Kong, developers may cut prices to clear
inventory. This could happen if homebuyers perceive mortgage rates will be higher for a
longer period. Under such a scenario, home prices in the secondary market may also fall
in tandem.
Indonesia developers will have limited capacity to deleverage. This is because we

anticipate sluggish generation of free operating cash flow due to slower sales and higher
construction costs and capex. Furthermore, as developers continue to refinance their
U.S. dollar debt obligations with domestic bank loans, they will erode their cash position
because of loan amortization.

Real Estate Investment Trusts Simon Wong

Singapore
+65-6539-6336
Pressure rising for office segment, but most REITs can manage
simon.wong
@spglobal.com

Hybrid working, economic uncertainties, pressure on corporate earnings will continue FFO to debt
to weaken office demand, coupled with oversupply of lettable office space in key (median, adjusted)
gateway cities, will increase vacancy and exert downward rental pressure for Asia-Pacific Global Asia-Pacific
14%
office landlords. 12%
10%
Continued recovery in tourism will boost the performance of hotels and downtown retail 8%
6%
malls. 4%
2%
More measured pace of acquisition and development given higher financing costs and 0%
hurdles. 2022a 2023f 2024f
Interest rates could remain high for longer. Leading to subdued credit metrics, (median, adjusted)
capitalization rate expansion, declining asset valuations, and an erosion in covenant Global Asia-Pacific
8x
headroom.
6x
Adoption of hybrid working compounds the office segment's supply-demand 4x
mismatch. Structural effect from flexible working practices is yet to fully emerge. Office
2x
vacancies will rise further.
0x
Further deterioration in business, consumer, and investor confidence. Leasing 2022a 2023f 2024f
conditions will become tougher. Waning investor confidence could accelerate wholesale
fund redemptions in Australia. All figures are converted into U.S. dollars
Tougher conditions will reduce buffers. While financial headroom could deteriorate, we
expect most rated Asia-Pacific REITs can tolerate the testing operating and financial
conditions. For asset classes that are not facing structural obstacles, we expect asset
valuation to remain largely stable for high-quality assets, given favorable supply-demand
dynamics and higher replacement costs.
REITs must manage shorter debt maturity profile. REITs' refinancing risk remains
manageable. However, further shortening of debt maturity profile could weigh on their
capital structure and credit quality.
Office asset valuations under the spotlight. The valuation declines in the office markets
have yet to eventuate, but there is a current valuation gap between listed and unlisted
office equity prices. A sharp and sizeable decline in office asset values could impinge on
credit metrics. In particular, as REIT managers articulate targeted gearing ranges that will
be tested.
"Flight to quality" benefits prime assets. Tenants' preference for prime retail locations
and sustainable office buildings will support rated Asia-Pacific REITs, given they own
quality assets.

Retail Sam Playfair

Melbourne
+61-3-9631-2112
Retailers' focus turns to cost efficiencies as sales moderate

sam.playfair
@spglobal.com

Persistent inflation, elevated interest rates, recession risks, and increasing FFO to debt
unemployment could dampen discretionary retail spending. (median, adjusted)
Global Asia-Pacific
Retailers to sharpen their focus on operational efficiencies as rising costs and shrinking 35%
30%
consumer budgets constrain earnings and threaten credit quality. 25%
20%
Tougher refinancing conditions for speculative-grade issuers with weaker profitability 15%
and higher debt levels. Issuers with unhedged floating-rate debt remain particularly 10%
5%
exposed. 0%
2022a 2023f 2024f

Consumption slowdown accelerates. Shrinking consumer budgets leads to a more Debt to EBITDA
(median, adjusted)
dramatic reduction in spending than expected, leaving retailers to face even tougher
operating conditions. Consumer spending in China following the lifting of COVID Global Asia-Pacific
3.0x
restrictions remains sluggish and fails to provide a sustainable consumption boost that 2.5x
Asia-Pacific domestic economies need at a time when growth is scarce. 2.0x
1.5x
Ability to pass through higher costs dwindles. Consumers become less willing to absorb 1.0x
0.5x
higher shelf prices. Retailers need to remain competitive on price to maintain market
0.0x
share, squeezing margins. 2022a 2023f 2024f
Refinancing on favorable terms will be tricky. Retailers refinancing fixed instruments will
face much higher rates, reducing their interest coverage ratio cushions. Those with higher All figures are converted into U.S. dollars
debt levels and weaker profitability will find raising debt challenging. using historical exchange rates. Forecasts
Profitability squeeze. As retailers' ability to pass on higher input and operating costs to
cash constrained consumers diminishes, EBITDA margins begin to buckle. Rating buffers
reduce and credit quality weakens.
Working capital management is crucial. As the cost-of-living pressures force consumers

to forgo discretionary purchases, retailers carrying excess or more seasonal products are
potentially at risk of being left with inventory that consumers no longer want or can
afford.
Rising cost of debt to have divergent effects. Rising debt costs will test capital
structures of speculative-grade issuers. Challenging capital markets will steer
investment-grade issuers to a more conservative capital management approach, staying
away from large debt-funded investments.

Technology David Hsu

Taipei
+886-2-2175-6828
Outlooks are turning more negative before cyclical trough

david.hsu@spglobal.com
Hins Li
Hong Kong
What do we expect over the next 12 months? +852-2533-3587
hins.li@spglobal.com
Rising rating pressure among tech companies due to deteriorating macroconditions and
rising rates.
A semiconductor downturn in 2023 due to weakening demand and industry-wide Rating Metrics
overstocking.
FFO to debt
Pace of demand recovery and safety stock will determine timing of cyclical trough. (median, adjusted)
Global Asia-Pacific
80%
60%
Uncertain macroeconomic outlook. China's growth restart is welcome, but the payoff 40%
could largely be domestic. Geopolitical tensions further expose Asia-Pacific tech firms to 20%
long-term risk.
0%
2022a 2023f 2024f
Excess inventory is the first roadblock to recovery. Industry-wide inventory correction
could take time with falling demand. Component and semiconductor suppliers could take
another one to two quarters after inventory for some end-products such as laptop reach
Debt to EBITDA
peak level in the first quarter this year. We currently expect the semiconductor market
(median, adjusted)
will drop about 10% in 2023 as the global supply chain resets inventory.
Global
Narrowing financial buffer. Most rated Asia-Pacific technology hardware issuers have 3.0x
enough cash flow and leverage buffer to withstand a moderate shortfall in revenue and 2.0x
profitability. However, a prolonged downturn in demand could reduce headroom.
1.0x

0.0x
2022a 2023f 2024f
Lower global IT spending. The current IT spending growth of 3.3% could be lowered due
to a pessimistic macroeconomic outlook, which would be meaningfully negative to certain
tech hardware issuers. using historical exchange rates. Forecasts
Increasing cash flow volatility amid inventory correction. Higher cash flow volatility for spot rate. FFO--Funds from operations. a--
rated hardware companies during the downcycle in 2023, with declining operating cash
flow before meaningfully destocking.
Rating bias could turn more negative owing to weak macroeconomic conditions and
rising rates.

Telecommunications Yijing Ng
Singapore
+65-6216-1170
Telcos invest for growth

yijing.ng@spglobal.com

Telecom operators' earnings will benefit, and rise mildly, from increased mobile data FFO to debt
traffic, wireline adoption, and the return of roaming revenues. (median, adjusted)
Global Asia-Pacific
Average capex intensity should ease slightly but remain high. There is some divergence 35%
30%
of capex risks across markets, hinging on the progress of 5G rollouts. 25%
20%
Rising investment focus on digital infrastructure may entail passive physical 15%
infrastructure sales to fund. 10%
5%
0%
2022a 2023f 2024f
Global recession fears could hurt consumer sentiment. Voluntary upgrades to higher-
priced services could slow. This could be exacerbated by a lengthening handset Debt to EBITDA
(median, adjusted)
replacement cycle that slows upgrades to wireless plans on newer technologies (4G/5G)
that typically command a higher price. The ability of telcos to hike prices to counter Global Asia-Pacific
4x
inflation-driven margin pressure could also weaken.
3x
Rising competition in some markets. Markets with new entrants, such as in the 2x
Philippines (Dito Telecommunity Corp.) could face more intense competition than in the
1x
past. Rising presence of mobile virtual network operators in markets such as Korea may
0x
result in more cautious pricing. 2022a 2023f 2024f
Heavy, upfront investments are necessary, but could cause leverage pressure. Telcos'
upfront 5G network and sporadic spectrum auctions could lead to balance sheet stress All figures are converted into U.S. dollars
and deviations from our base case. This is happening while meaningful monetization from using historical exchange rates. Forecasts
5G industrial-use cases remains distant. In addition, telcos have been investing in new spot rate. FFO--Funds from operations. a--
growth engines, particularly in digital infrastructure businesses such as data centers, to Actual. f--Forecast.
boost growth. Such investments, if debt-funded, can erode rating headroom.

Telcos cannot depend on rising earnings alone to fund growth. Consumers delaying
discretionary upgrades, or even trading down, will dampen earnings. In contrast, growth
investments are necessary for competitive parity and cannot be delayed. Telcos will have
to turn to other avenues to relieve balance sheet pressure.
Leverage balancing act remains key. We expect telcos to continue reevaluating

infrastructure asset portfolios, non-core assets, and business structures. This is to create
balance sheet capacity for continued investments into connectivity, as well as
investments further away from the traditional connectivity business to boost longer-term
growth.

Transportation Cyclical Isabel Goh

Singapore
+65-6517-6110
Diverging recovery in face of high costs

isabel.goh@spglobal.com

Low order books will continue to facilitate strong demand rebound for aviation and FFO to debt
keep tanker dynamics firm, despite some correction. (median, adjusted)
Global Asia-Pacific
Still, a slowing global economy and elevated costs remain a threat to the pace of 40%
recovery. 30%
We expect the decarbonization agenda to regain importance as airline and shipping 20%
operators gradually transition toward cleaner-energy and more fuel-efficient models, 10%
gearing toward the net-zero target. 0%
2022a 2023f 2024f

Economic slowdown. A global economic downturn could lower the pace of recovery on Debt to EBITDA
(median, adjusted)
the back of weakening consumer demand and softening prices. Container shipping lines
and airlines with large exposure to air cargo will face further freight rate corrections amid Global
4x
subdued global trade and capacity oversupply. Postal companies continue to face tough
3x
conditions amid structural declining volumes.
2x
Elevated interest rates and costs. High rates, though slowing, will keep funding costs
1x
elevated. While oil prices should ease from 2022 peaks, they remain high. That, along with
0x
labor inflation could pose risks to transportation operators' earnings recovery. 2022a 2023f 2024f
Supply side constraints, despite some easing. Delays in new aircraft deliveries, backlogs
in aircraft maintenance, and staffing issues continue to weigh on aviation by limiting All figures are converted into U.S. dollars
capacity restoration. using historical exchange rates. Forecasts
Ongoing inflationary pressure clouds earnings recovery. Pent-up demand for travel
should continue to drive demand for passenger-focused companies. Yet the profitability
of freight transportation could weaken from moderating prices and high fuel, labor costs.
Decelerating interest rate hikes may signal a potential return to capital markets. This is
particularly among investment grade entities with greater investor appetite and upcoming
refinancing needs. Companies could be inclined to divert access cash to debt repayment
to reduce interest expenses.
A refocus toward green agenda could mean higher capital expenditure. Improving
industry prospects could encourage freight operators to invest in more fuel-efficient
fleets, following reduction in capex during the pandemic. This could limit meaningful
deleveraging over the next few years.

Transportation Infrastructure Richard Timbs

Sydney
+61-2-9255-9824
Rising interest rates and cost of living restrain demand uplift

richard.timbs
@spglobal.com
Laura Li, CFA

What do we expect over the next 12 months? Hong Kong
+852-2533-3583
Higher cost of living is keeping a lid on improving demand across all subsectors. laura.li@spglobal.com
Companies cautiously reviving capital investment plans amid higher interest rates
(except China). Rating Metrics
Negative bias to remain steady at about 8% due to cost pressures, management risk FFO to debt
appetite for debt or governance risk. Stable outlook for Chinese issuers, traffic recovery (median, adjusted)
and strong domestic financing capability will help sustain continued capital expenditure. Global Asia-Pacific
20%
15%
10%
Inflation risks. Increasing cost of living could weigh on travel and demand for goods, while 5%
volatile fuel costs and lingering supply chain disruptions also pose risks. Inflation will 0%
remain low in China though. 2022a 2023f 2024f
Higher interest rates could create financial pressure. This could be acute, particularly
for issuers more reliant on dollar funding, and those with lower interest rate hedging or
Debt to EBITDA
large refinancing or capex needs.
(median, adjusted)
Global Asia-Pacific
What do they mean for the sector? 10x
8x
Restrained margin improvement. Higher energy prices and potential wage inflation could 6x
squeeze margins. Significant traffic recovery in China will underpin profitability recovery. 4x
2x
Demand will lift across most subsectors; but will vary across countries. Airports will see 0x
strong domestic trend (80%-100% of pre-covid levels), but international traffic may not 2022a 2023f 2024f
get to pre-COVID levels before mid-2024. We expect domestic air traffic in India to
surpass pre-COVID levels and international will reach 100% of pre-COVID levels in the
current fiscal year. Ports are likely to remain resilient whereas toll roads are seeing a using historical exchange rates. Forecasts
strong return in traffic to pre-covid levels with some, such as in Australia, already above spot rate. FFO--Funds from operations. a--
pre-COVID levels. Passenger rail could take 12-18 months to see demand recover to pre- Actual. f--Forecast.
COVID days.
Financial metrics could be at risk. This will hinge on the pace of capex, debt usage for
capital investments and hedging levels in an environment of higher interest rates in most
countries (except China). Low interest rates in China could benefit some infrastructure
players.

Utilities Laura Li, CFA

Hong Kong
+852-2533-3583
New investments, leverage, and interest rates remain key

laura.li@spglobal.com
Parvathy Iyer
Melbourne
What do we expect over the next 12 months? +61-3-9631-2034
parvathy.iyer
Most countries in the region will continue to diversify into renewables, which will keep @spglobal.com
capex high.
Investment in grid infrastructure and energy storage to support renewables is picking Rating Metrics
up.
FFO to debt
Negative rating bias due to high leverage in the sector and fuel cost pressures, as well as (median, adjusted)
a lag in recovering costs in some markets. Outlook is stable for Chinese issuers, based on
Global Asia-Pacific
profitability recovery amid deepening market-based reform. 20%
15%
5%
Inflation and high interest rates to bite. Fuel costs are passed through in most markets;
0%
but cost pass-through ability may not be even across all entities. Inflationary risk will be a 2022a 2023f 2024f
key factor for new projects. Rising rates in most markets could alter funding options and
costs for most entities, except those in China.
High pace of new investments and funding. We view excessive debt funding of new Debt to EBITDA
(median, adjusted)
developments, adverse regulatory reforms or interventions, and grid constraints as risks.
Capex will likely be mainly on renewable projects, integrated hybrid projects, grid and Global Asia-Pacific
6x
energy storage, or coal majors buying renewable assets. This is also due to likely more 5x
frequent extreme weather. 4x
3x
Supply chain issues easing but remain. These remain a risk to the cost and time to 2x
completion for new projects, depending on the project's stage. Companies may still have 1x
0x
to factor this risk in budgeting and capex delivery processes as it may take a few months 2022a 2023f 2024f
for supply chains to normalize. Chinese issuers benefit from resilient supply chains.
What do they mean for the sector? using historical exchange rates. Forecasts
Higher working capital due to timing mismatch of recovering higher costs and Actual. f--Forecast.
electricity price volatility. In China, with stabilizing fuel costs and a growing mix of
renewable power, profitability will recover faster.
Liquidity risk. Restrained access to funding sources could increase interest costs and
lead to capex reviews. However, most rated Chinese players benefit from government
support.
Lack of offtake contracts that support capex progress can hit balance sheets. Chinese
issuers are mostly making heavy investments in renewable energy.

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SP Global - Industry Top Trends Midyear 2023 - 230904 - 072620

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Industry Top Trends

This report does not constitute a rating action

Aerospace and Defense | Robust demand amid choppy supply .................................................................................................................... 8

Autos | Look before you leap ............................................................................................................................................................................. 9

Capital Goods | U.S. manufacturers ride a wave of late-cycle demand ......................................................................................................... 11

Chemicals | Credit outlook dims following weak demand recovery .............................................................................................................. 12

Media and Entertainment | Secular challenges magnified by an advertising recession ............................................................................. 17

Midstream Energy | Solid credit quality amid a shifting landscape .............................................................................................................. 19

Real Estate | Higher-for-longer interest rates are a headwind...................................................................................................................... 21

Regulated Utilities | Credit quality should stabilize ........................................................................................................................................22

Technology | Elevated rates most detrimental to speculative-grade issuers ............................................................................................. 24

Transportation Infrastructure | Mobility grows despite affordability risks ................................................................................................. 26

Transportation | Strong air travel demand but slowing freight .....................................................................................................................27

Autos | Heading toward a moderate slowdown ............................................................................................................................................. 30

Capital Goods | Secular tailwinds provide support in challenging environment ......................................................................................... 32

Media and Entertainment | Holding up to technological and macroeconomic disruption ........................................................................ 38

spglobal.com/ratings July 27, 2023 2

Telecommunications | Solid outlook, but caution on structural M&A changes .......................................................................................... 43

Transportation | Air travel recovers, container freight rates plunge............................................................................................................ 45

Utilities | Electricity and gas continue to flow, but at a price ....................................................................................................................... 46

Autos | Demand uncertainty and pricing pressure to persist ........................................................................................................................47

Building Materials | Asia-Pacific producers brace for market volatility ....................................................................................................... 48

Consumer Products | Modest recovery in performance ahead ..................................................................................................................... 51

Gaming | Better prospects of a revenue recovery across the region ........................................................................................................... 52

Oil and Gas | Supportive hydrocarbon prices to continue in 2023 ............................................................................................................... 55

Retail | Retailers' focus turns to cost efficiencies as sales moderate ......................................................................................................... 58

Telecommunications | Telcos invest for growth ............................................................................................................................................ 60

Transportation Cyclical | Diverging recovery in face of high costs ................................................................................................................ 61

spglobal.com/ratings July 27, 2023 3

Industry Top Trends Midyear 2023: Key Themes

What's changed, what matters, what are the risks?

The big picture - themes and risks

spglobal.com/ratings July 27, 2023 4

But taken as a whole, the better-than-expected macroeconomic environment has been

spglobal.com/ratings July 27, 2023 5

spglobal.com/ratings July 27, 2023 6

spglobal.com/ratings July 27, 2023 7

Aerospace and Defense Jarrett Bilous

What’s changed? Rating Trends

volumes and efficiencies next year.

Heightened share repurchases. Certain higher-rated defense companies remain active

Future declines in defense spending. Political pressure to contain budget deficits,

spglobal.com/ratings July 27, 2023 8

Autos Nishit Madlani

Look before you leap spglobal.com

What’s changed? Rating Trends

spglobal.com/ratings July 27, 2023 9

Building Materials Ana Lai, CFA

Higher rates and lower spending to pressure ratings spglobal.com

What’s changed? Rating Trends

What to look out for? Net Outlook Bias (%)

spglobal.com/ratings July 27, 2023 10

Capital Goods Don Marleau, CFA

U.S. manufacturers ride a wave of late-cycle demand spglobal.com

What’s changed? Rating Trends

What to look out for? Ratings Outlook Net Bias

U.S. capital goods tends be a late-cycle, interest-sensitive sector. Economic

spglobal.com/ratings July 27, 2023 11

Chemicals Paul Kurias

Credit outlook dims following weak demand recovery spglobal.com

What’s changed? Rating Trends

What to look out for? Ratings Statistics (YTD)*