This report looks at the sectors, spreads, and credit metrics of 480 entities for which S&P Global Ratings completed credit estimates in second-quarter of 2019. The report also compares these metrics with those of U.S. companies whose credit estimates we completed in 2018 for the same period.
The 480 entities for which we provided credit estimates represent 29 sectors. Business and consumer services, technology, and healthcare continue to be the dominant sectors in which companies collateralize middle-market collateralized loan obligations (CLOs). Middle-market loans continue to have higher spreads than broadly syndicated loans (BSL)--middle market loans had on an average a spread of 5.7% over LIBOR, over 2.0% more than the 3.5% average spread over LIBOR for loans in BSL CLOs. Sectors with the highest spreads over LIBOR include engineering and construction, commodity chemicals, and aerospace and defense (oil and gas exploration and production + integrated had an average spread over LIBOR of 10%; however, only one entity represented this sector, so we removed this outlier from the spreads dataset). Sectors with the lowest spreads include telecom and cable, auto original equipment manufacturers, and containers and packaging.
In total, 334 entities for which we issued credit estimates in second-quarter 2019 also had a credit estimate last year. Of these entities reviewed, we affirmed the estimates of 291 entities, raised 20, and lowered 23. Upgrades were due to performance improvements including reduced leverage due to debt paydowns and better earnings. One driver in common for all upgrades was a notable increase in EBITDA. Entities for which we raised our score increased their EBITDA by 20% and reduced leverage by 22%, on average, from the time of their last review in 2018. Common themes among entities with lower estimates include higher leverage ratios due to lower EBITDA, along with weaker liquidity positions and reduced covenant headroom. Downgraded entities showed a 12% decrease in EBITDA since their last review in 2018. Of the 480 entities analyzed, nearly 60% had debt facilities that mature in 2023 or later.
With the pressure on liquidity and funding, we have seen weaker players experience greater stress levels resulting in more 'ccc' scores. We assign a score in the 'ccc' category to entities that we believe are currently vulnerable and depend on favorable business, financial, and economic conditions to meet their financial commitments. These entities are typically characterized by their unsustainable capital structures, which include high debt leverage, consistently and materially negative discretionary cash flow, and inability to organically reduce leverage. Reflecting their higher-risk debt, 'ccc' credit estimates had an average spread over LIBOR of 6.4% versus 5.4% for entities with a credit estimate score of 'b-' or higher.
Nearly 70% of second-quarter downgrades fell into the 'ccc' category due to decreased earnings and higher leverage ratios. Since their last review, downgraded entities whose credit estimate scores fell into the 'ccc' category had, on average, a 23% decrease in EBITDA and an average S&P Global Ratings-adjusted debt to EBITDA of 15x. We also assessed the entities' liquidity positions by evaluating the sources and uses of cash on a 12-month forward-looking basis. Other than two entities, the liquidity positions of entities downgraded to a 'ccc' credit estimate score were assessed at less than adequate or weak, signaling a potential negative liquidity event or low likelihood of being able to absorb low-probability adversities. The aerospace and defense, healthcare, branded nondurables, specialty chemicals, retail and restaurants, capital goods, and technology sectors all had entities with credit estimates that fell into the 'ccc' category.
As of second-quarter 2019, loan defaults in middle market CLOs remained low. During this period, only one entity received a 'd' credit estimate score after missing an interest payment to subordinated debtholders due to senior lenders blocking it. In addition, one entity received a selective default ('sd') credit estimate score due to lenders delaying cash interest payments in exchange for warrants, which we perceive to be of less value than the original promise without adequate offsetting compensation.
Chart 1
Table 1
| Spreads By Sector | ||||
|---|---|---|---|---|
| Sector | Average spread over LIBOR (%) | |||
| Engineering and construction | 6.73 | |||
| Commodity chemicals | 6.67 | |||
| Aerospace and defense | 5.97 | |||
| Transportation - cyclical | 5.95 | |||
| Oil and gas drilling equipment and services | 5.83 | |||
| Media and entertainment | 5.82 | |||
| Branded nondurables | 5.81 | |||
| Healthcare equipment and supplies | 5.66 | |||
| Business and consumer services | 5.58 | |||
| Retail and restaurants | 5.57 | |||
| Technology - software and services | 5.52 | |||
| Metals and mining upstream | 5.50 | |||
| Technology - hardware and semiconductors | 5.50 | |||
| Consumer durables | 5.43 | |||
| Forest and paper products | 5.42 | |||
| Capital goods | 5.41 | |||
| Healthcare services | 5.39 | |||
| Pharmaceuticals | 5.35 | |||
| Building materials | 5.33 | |||
| Environmental services | 5.31 | |||
| Specialty chemicals | 5.27 | |||
| Leisure and sports | 5.23 | |||
| Railroads and package express | 5.00 | |||
| Auto suppliers | 4.89 | |||
| Real estate investment trusts | 4.88 | |||
| Containers and packaging | 4.75 | |||
| Auto OEM Limited | 4.50 | |||
| Telecom and Cable | 4.14 | |||
| OEM--Original equipment manufacturer. | ||||
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Charts 6
Note: We have removed the cash interest coverage ratio distribution chart from our report.
Related Research
- Credit Estimates Within Middle Market CLOs: First-Quarter 2019, May 28, 2019
- Credit Estimates Within Middle Market CLOs For Second-Quarter 2018, Aug. 14, 2018
- Credit Estimates Within Middle Market CLOs: First Quarter 2018, July 16, 2018
- Credit Estimates Within Middle Market CLOs: February 2018, May 9, 2018
- Credit Estimates Within Middle Market CLOs: January 2018, March 14, 2018
- CLO Spotlight: Middle Market Loan Performance: A Decade in Review, Sept. 11, 2017
This report does not constitute a rating action.
| Primary Credit Analyst: | Stewart M Webster, New York + 1 (212) 438 8619; swebster@spglobal.com |
| Secondary Contact: | Alan B Shabatay, New York + 1 (212) 438 9025; alan.shabatay@spglobal.com |
| Analytical Manager: | Ramki Muthukrishnan, New York (1) 212-438-1384; ramki.muthukrishnan@spglobal.com |
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