David Carruthers

Renewable energy is at the centre of efforts to tackle climate change, but there have been setbacks to growth. 80%+ of energy demand is still met by fossil fuels, with fossil fuel companies reporting record profits as global energy prices spike. In the past two years, renewable credit risk has deteriorated and traditional energy has improved. However, there are some signs that the credit tide may be turning.

The February Monthly Credit Outlook looks at recent credit trends and highlights seen in the consensus dataset. This month, credit risk is elevated but some positive surprises may be possible.

With more teams playing than ever before (and a further expansion planned for 2026) the World Cup might provide some real surprises. But for a quadrennial contest that has been around for over 90 years, the list of winners is a bit repetitive. This insight compares average Sovereign Credit Consensus Rating for each of the defined Winners, Determined and Unqualified groups.

COP27 needs to answer one question: is a declining standard of living the price of a sustainable future? Countries with weaker credit ratings will typically see more impact of climate change – with some exceptions. This report compares Sovereign credit against climate impact risk.

The COVID outbreak led to widespread and rapid credit deterioration across multiple sectors; the subsequent recovery has been slower but has reversed much of the decline as economies have re-opened. But with war, supply shocks, inflation and rising rates, the improvement across multiple sectors has stalled and a growing number of them are turning down again.

Many credit portfolio managers expect default rates – currently around 2% – to be sharply higher in 2023, but the scale of the increase is still a major unknown. A useful metric to anticipate rising defaults is credit volatility – if this trends higher, credit category transition rates will increase, including transitions into default.

Inflation dominated Q3 financial news, and the resulting short rate squeeze is biting while credit volatility is rising and the COVID recovery is running out of steam. Risk indicators are high in the UK, and oil and gas price volatility has brought havoc to Europe. In North America, weaker credit trends are appearing in several sectors. Believe it or not, there are some bright spots amidst this turmoil. This whitepaper elaborates on some of these trends and shows where credit could be headed next.

The Business Development Company sector in the US has grown steadily over the past 20 years. While BDCs allow retail investors to gain liquid exposure to portfolios of private companies, their historically high returns have been dented recently by some steep falls in valuations and – in some cases – discounts to net asset values.