The heightened risk of sovereign ratings downgrades in response to the COVID-19 crisis is likely to have the consequential impact of lowering the ratings of government related entities where there is deemed to be on-going support and extra-ordinary support from government.  It may also lower the ratings of financial institutions where there is deemed to be systemic support provided by government and lower the ratings of structured transactions that are underpinned by instruments supported by financial institutions.

Of particular concern are the borderline investment grade rated entities and transactions that have a direct or indirect links to the sovereign rating.  If an entity is downgraded to non-investment grade (or “junk”) then many investors may be forced to sell if their investment mandates prevent them from holding non-investment grade debt.  This will make any future debt requirements increasingly expensive for these new non-investment grade entities.

Read more about government related entities and their exposure to sovereign risk by downloading our report below.