Quick takeaway
The COVID-19 pandemic triggered rapid, large-scale rating actions and tighter surveillance in 2020–21. In the medium term (2022–2025) emergency policy support, earnings recoveries and selective deleveraging stabilised credit profiles in many markets — but the post-COVID landscape is structurally different: higher public and corporate debt, concentrated future maturities, faster integration of ESG and alternative data into analysis, stronger regulatory scrutiny, and greater reliance on scenario-based and model-driven surveillance. For issuers, investors and regulators the message is the same: ratings matter more than ever, but they must be used as forward-looking inputs within robust risk frameworks.
Introduction
The pandemic was a stress test for credit-rating frameworks. Agencies responded with unprecedented speed and scale: rating-watch placements, frequent outlook updates and a wave of downgrades across the most affected sectors. Over the following years, extraordinary fiscal and monetary measures prevented a broader cascade of defaults and allowed many issuers to recover. Yet the crisis left lasting fingerprints — elevated leverage, potential refinancing cliffs, and a regulatory focus on timeliness, transparency and model governance. This article explains what changed, why it matters, and what market participants should do to adapt.
1. The immediate shock and how agencies responded
When COVID-19 lockdowns hit, ratings agencies moved quickly to reflect the new reality. Travel, hospitality, commercial real estate and some parts of retail and services faced material revenue shocks and liquidity stress. Agencies used watch/outlook actions and downgrades to communicate the change in risk, often faster than they did in previous crises. That rapid response helped markets re-price risk quickly but also intensified short-term volatility.
Key early impacts:
- Widespread short-term downgrades in vulnerable sectors.
- Elevated surveillance intensity and frequent sector notes.
- A higher volume of ratings-watch and negative-outlook placements than in typical cycles.
2. Policy support — the stabiliser
Fiscal packages, lender moratoria, liquidity windows, and central bank interventions materially altered outcomes. In many jurisdictions, policy support converted prospective defaults into temporary stress episodes, reducing permanent default rates versus worst-case scenarios.
Practical effects:
- Liquidity facilities and moratoria gave issuers time to stabilise cash flows.
- Many corporates and financial institutions used the breathing room to refinance, restructure, or shore up balance sheets.
- Sector recoveries have been uneven: technology, healthcare and some manufacturing segments recovered faster, while commercial real estate and parts of travel still lag.
3. Structural aftershocks: higher leverage and refinancing risk
Although headline credit metrics improved for many firms, the aggregate debt burden rose:
- Sovereign and corporate leverage increased after pandemic spending and corporate borrowing, widening vulnerability to slower growth or tighter financial conditions.
- Refinancing risk is a material near-term concern: clusters of debt that were rolled over or contracted during the pandemic create concentrated maturities in the mid-to-late 2020s. Agencies are monitoring maturity profiles closely.
- Sectoral divergence persists: some sectors permanently restructured or shrank, while others accelerated growth, creating a bifurcated credit landscape.
These structural features make forward-looking scenario analysis essential for credit assessments.
4. Methodological change: scenario analysis and faster surveillance
The pandemic exposed limitations in real-time monitoring and prompted agencies to evolve:
- Agencies increased use of multi-scenario analysis (liquidity stress, revenue shocks, covenant erosion) rather than single-point projections.
- Surveillance procedures became more formalised: faster watch placements, more frequent public sector and industry notes, and clearer articulation of assumptions behind actions.
- Rating criteria were updated to emphasise liquidity, contingent liabilities and operational resilience.
This made ratings more dynamic and help markets act on early signals — but it also raised the data and validation burden for both agencies and rated entities.
5. ESG integration — from peripheral to mainstream
Post-COVID, ESG factors moved further into mainstream credit analysis:
- Governance and management quality proved decisive in how quickly firms adapted to operational shocks.
- Social elements (workplace safety, supply-chain resiliency) and transition risks (for carbon-intensive sectors) started to be explicitly included in credit assessments.
- Agencies developed ESG-credit indicators and explanatory supplements to show how sustainability factors influence ratings over the medium term.
ESG is not a single driver of pandemic-era downgrades, but it has become an important differentiator for resilience and long-term rating stability.
6. Data, technology and model governance
To manage larger surveillance volumes and improve timeliness, rating firms invested in data and analytics:
- Loan-level and alternative data (payment flows, mobility indicators, real-time sales) supplemented traditional financial statements, especially in structured and consumer-credit segments.
- Machine learning and automation were deployed for initial screening and stress-scenario runs.
- Regulators and standard setters emphasised explainability, validation and auditability — ensuring models enhance rather than obscure credit judgements.
Stronger model governance is now a regulatory and market expectation.
7. Regulatory scrutiny and market governance
COVID-era actions prompted deeper regulatory reviews of agency behaviour and disclosures. Key regulatory themes since 2020:
- Greater expectations for methodology transparency and public explanation of crisis-period choices.
- Pressure to avoid mechanical reliance on single ratings in prudential rules and to favour multi-input risk assessments.
- Enhanced scrutiny of agency conflicts of interest and surveillance timeliness.
Regulators now expect ratings to be auditable, well documented and used as one input among many in prudential frameworks.
8. Market practice — how issuers, investors and banks adapted
- Issuers improved liquidity planning, diversified funding, and proactively engaged with agencies to explain stress-mitigation plans.
- Investors incorporated agency scenario outputs, migration probabilities and stress-testing into portfolio construction rather than relying solely on letter-grade changes.
- Banks and supervisors increased internal monitoring and stress testing to complement external grades and to avoid mechanistic regulatory triggers.
These changes improved resilience but demand stronger internal capabilities across the board.
9. Key risks to watch (2025 and beyond)
- Refinancing cliffs: concentrated maturities could stress lower-rated issuers if market liquidity tightens.
- Sovereign pressures: elevated public debt could compress corporate ceilings and reduce recovery prospects in extreme scenarios.
- Model risk & data gaps: rapid adoption of alternative data and AI requires rigorous validation to avoid false positives/negatives.
- ESG standardisation: inconsistent ESG metrics risk divergent credit inferences across agencies and investors.
Active monitoring and scenario planning are essential to navigate these risks.
10. Practical guidance
- For issuers: build liquidity buffers, stagger maturities, improve disclosure and engage rating analysts early — proactive transparency reduces surprise downgrades.
- For investors: use ratings alongside migration and stress metrics; treat outlook/watch notices as valuable early-warning signals.
- For banks and regulators: avoid single-rating dependence in prudential rules; use multiple inputs and robust stress frameworks.
- For advisors: help clients model rating migrations, covenant impacts and refinancing scenarios — practical drills pay dividends in stress periods.
Conclusion
The post-COVID era reshaped credit-rating practice: faster surveillance, scenario emphasis, deeper ESG and data integration, and a stronger supervisory spotlight. Policy support blunted the worst outcomes, but higher leverage and concentrated maturities mean vulnerability remains. Ratings are no longer static signals of past performance — they are increasingly dynamic, model-rich, forward-looking tools that must be interpreted in the context of cash-flow scenarios, liquidity plans and macro risks.
For corporate treasuries, CFOs, portfolio managers and regulators, adapting to this new environment means treating ratings as one trusted input within a disciplined framework of stress testing, data governance and proactive communication.
FinMen Advisors
At FinMen Advisors we help firms translate these trends into action — from rating readiness and scenario modelling to refinancing strategies and agency engagement. If you’d like a tailored briefing or a complimentary readiness assessment for your upcoming funding or surveillance cycle, contact us and we’ll prepare a focused plan for your team.
