When the Covid-19 crisis hit financial markets in March 2020, it was clear that corporate credit would be the focus of concerns as earnings evaporated and balance sheets were put under stress.
“This crisis was first and foremost a corporate credit challenge,” says Paloma San Valentin, head of corporate finance for North America at Moody’s. “We understood that very early on and organised ourselves to respond in a very systematic, consistent, transparent, and thoughtful manner.”
It quickly categorised each corporate sector globally according to its exposure to the pandemic, and by March 16 had published its views of relative sector exposure.
Moody’s looked at its full rated corporate portfolio and at each credit story. “We didn’t leave any stone unturned,” she says. “We didn’t know how long it would last, or how deep and severe the crisis would be, but we knew which sectors would be the most affected.”
Moody’s took downgrade rating actions on nearly 1,200 of its approximately 3,500 corporate ratings globally in the following year, with the majority of these actions taking place during March and April, at the outset of the crisis. Around 90% of downgrade actions affected the speculative grade portfolio and those sectors more exposed to the crisis also saw more negative rating activity.
“We acted quickly but we also acted thoughtfully,” says San Valentin. “We did not paint all our rating actions with the same brush.”
Moody’s tried hard to avoid putting entire sectors under review or keeping reviews going for a long period of time, aware of the damaging effects of uncertainty for market participants, says San Valentin. “We placed whole sectors on review in very few cases, and only when warranted by a high degree of uncertainty. We then resolved those reviews in a timely manner.”
“Our differentiated approach resonated with investors and we communicated our views with transparency,” is how she sums up the approach to investors. The pace of rating activity abated to more normalised levels by mid-2020.
The economic recovery has now reached a point where half of its 24 industry sectors globally are on positive outlook. “That doesn’t mean we don’t have concerns in sectors or regions where the recovery is going to be more protracted and choppier, but positive momentum has consolidated.”
The high level of liquidity in the market due to central bank and institutional action has been one of the main factors underpinning the shortness of the crisis period and the quick rebound. “Without that support and stimulus, we would probably be having a very different conversation,” she notes.
The expertise of Moody’s analytical teams was key to understanding the evolving credit dynamics and impact on ratings. “What was also very important throughout was to maintain and enhance the quality and transparency of the dialogue we had with our issuers — even when we had to communicate negative rating decisions — and is one of the lessons of the crisis.”
Internally, too, the crisis brought home the importance of working together as a single team. “We reached out across the organisation as we had not done before,” says San Valentin. “It’s ironic that operating in a virtual environment improved our ability to connect with others. The crisis showed us we’re a bigger organisation and the power of global collaboration in making our opinions more insightful and more valuable to the market.”
Moody’s is notable for having female leaders in all its main ratings businesses, and the global and regional heads of its corporate finance group are all women. So, while diversity has become a buzzword in finance, San Valentin says that it’s an integral part of its day to day. “It’s the premise of how we make most decisions,” she says. “We put together a diverse group of (credit) professionals with different points of view and a voice that informs the discussion. This strengthens the quality of our decisions and our opinions.”
She also says that Moody’s is trying to be more impactful with its external communication, for instance using colourful infographics that are full of key data in an easily-digestible format as an alternative (or a complement) to long-form reports.
“We want to help investors make better decisions,” she says. “If that means summarising the work of a whole year on a single slide, so be it as long as it helps us to tell investors the credit story in a much more clear, concise and visually appealing way.”
