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Credit Trends: Distressed Debt Monitor: The U.S. Distress Ratio Ebbs On Lower Borrowing Costs

The U.S. distress ratio--defined as the proportion of speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries--decreased to 7.4% as of Dec. 31, 2019, from 8.9% as of Nov. 18. The narrowing distress ratio is currently tracking borrowing costs in general, which have tapered on expectations for lower monetary policy to continue in the near term. Specifically, this will benefit lower-rated issuers facing upcoming maturities, but risks remain, including slowing economic growth, heightened political uncertainty, and volatile trade.

By sector, oil and gas has experienced the sharpest year-over-year increase in the distress ratio to 27.8% from 18.2%--the majority of which is because of oil and gas exploration issues. The sector negative bias (measured by the proportion of ratings with negative outlooks or on CreditWatch with negative implications) greatly exceeds its long-term average, signaling further credit deterioration ahead. Oil and gas companies have $98 billion dollars in speculative-grade rated debt instruments maturing through 2024, with peak maturities in 2022. If financing conditions become less supportive, we may see an increase in distressed debt instruments and ultimately even an uptick in defaults from the sector.

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Chart 2

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Credit Risks Emerge For Lower-Rated Oil And Gas Issuers

The overall U.S. speculative-grade composite spread has tightened since May 2019, and the overall distress ratio remains lower than its 10-year average. However, risk remains in the oil and gas sector, which leads the distress ratio at 27.8% and 42 distressed credits. At the end of 2019, credit spreads in the speculative-grade oil and gas narrowed to 750 bps from recent highs of 1,020 bps in November 2019, signaling more-accommodative financing conditions.

Chart 3

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Table 1

The Oil And Gas Sector Experiences The Highest Month On Month Rise In Distressed Credits, While Retail And Restaurants Reports The Highest Fall, Since Last Month
Number of distressed issues Distressed ratio * (%) Distribution of distressed credits (%) Total debt affected (mil. $) Difference in % of distressed credits (MoM) Debt-based distressed ratio (%) % change of distressed credits by sector
Aerospace and defense 1 5.0 0.8 525 3.3
Automotive
Banks and brokers
Capital goods 3 4.9 2.3 1,290 (0.9) 4.3 (40)
Chemicals, packaging, and environmental services
Consumer products 4 3.1 3.1 1,970 (0.8) 2.7 (33)
Financial institutions 5 3.6 3.9 1,503 0.7 4.4 0
Forest products and building materials 4 6.7 3.1 1,256 (0.1) 5.3 (20)
Health care 7 7.4 5.5 6,820 0.3 8.6 (13)
High technology 2 2.0 1.6 767 (0.4) 1.2 (33)
Homebuilders/real estate co.
Insurance 2 6.1 1.6 528 0.3 3.5 0
Media and entertainment 9 3.8 7.0 5,018 0.5 3.2 (10)
Metals, mining, and steel 2 3.6 1.6 689 0.3 2.4 0
Oil and gas 42 27.8 32.8 16,079 (2.9) 23.1 (24)
Retail/restaurants 15 18.8 11.7 5,452 0.7 13.5 (12)
Telecommunications 21 15.3 16.4 14,326 1.5 11.4 (9)
Transportation 3 7.0 2.3 1,520 1.0 6.7 50
Utilities 8 4.8 6.2 2,512 0.4 3.0 (11)
128 7.4 60,255 6.2
*S&P Global distress ratio is defined as the number of speculative-grade issues with option-adjusted spreads above 1,000 basis points to the total number of speculative-grade issues. Data as of December 31, 2019. Source: S&P Global Ratings Research. Distribution of distressed credits is defined as the distribution, by sector, within all speculative-grade issues with option-adjusted spreads above 1,000 basis points. **Outstanding debt amount associated with distressed issues divided by the total debt outstanding of speculative-grade issues.

Table 2

The Current Negative Bias Of U.S. Based Oil And Gas Issuers Widely Surpasses Their Long-Term Average
Current negative bias* Long-term average of negative bias* Proportion of 'B-' and below new issues (trailing three years)** Proportion of 'B-' and below outstanding issuer ratings***
Oil and gas 33.0 19.2 18.2 45.6
Retail/restaurants 29.5 26.9 19.5 33.3
Telecommunications 29.0 25.5 23.1 43.6
*Negative bias is calculated as the number of U.S. issuers with either a negative outlook or on CreditWatch negative, divided by the total number of U.S. issuers with either positive, negative, or stable (outlook or CreditWatch) implications. The long-term average is taken from 1995 to the present. **The proportion of 'B-' and lower issues is measured relative to the total number of speculative-grade issues. The statistic is calculated for instruments issued in the U.S. during the trailing three years. ***The proportion of 'B-' and lower U.S. issuers is measured relative to the total number of U.S. speculative-grade issuers. Source: S&P Global Ratings Research. Data through 12/31/2019.

Surveilling Defaults

The variability in the distress ratio--along with other economic, financial, and credit-related factors--generally corresponds with changes in default rates.

The economic indicators continued to remain positive in 2019. The unemployment rate improved in 2019, lowering to 3.5% in December 2019 from 3.9% in December 2018 but remaining relatively unchanged in the fourth quarter. The Fed Senior Loan Officer Survey indicated demand for loans remained relatively unchanged in the fourth quarter, but, moving into 2020, banks reported they expect tightening standards for most categories of business, credit card, and auto loans but left standards unchanged for mortgage loans (see "Senior Loan Officer Opinion Survey on Bank Lending Practices," found at https://www.federalreserve.gov/data/sloos/sloos-202001.htm)

Financial indicators are mixed--the distress ratio has contracted slightly in the fourth quarter as well as year over year. Additionally, after entering negative territory in the second and third quarters of 2019, the slope of the year curve widened to 0.29 as of December 2019. In contrast, the downgrade ratio (the share of rating actions that were downgrades) and U.S. corporate defaults each rose to their highest quarterly levels since 2016 at 77%. The speculative-grade default rate also increased in the fourth quarter of 2019 to 3.1% in December from 2.8% in September 2019.

With this uptick in defaults, S&P Global Ratings Research expects the U.S. trailing-12-month speculative-grade corporate default rate to reach 3.9% by September 2020 (see "The U.S. Speculative-Grade Corporate Default Rate Is Expected To Reach 3.9% By September 2020," published Nov 20, 2019). Following the 2008 recession, the U.S. speculative-grade default rate bottomed out at 1.96% in September 2011, and then it eventually hit its apex of 5% at the beginning of 2017 before dropping to 2.3% as of May 31, 2019.

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Additional Exhibits

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Chart 8

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Chart 10

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Table 3

List Of Distressed Credits By Issuers
Sector/company Issuer ratings are for a related entity Issue count Outstanding amount (mil. $) Rating Outlook/ CreditWatch
Automotive
Midas Intermediate Holdco II LLC Yes 1 375.0 B- Negative
Capital goods
Ahern Rentals Inc. 1 550.0 B Negative
Aptim Corp. 1 515.0 CCC+ Stable
Optimas OE Solutions Inc. Yes 1 225.0 CCC+ Stable
Consumer products
Pyxus International Inc. 1 635.4 CCC Negative
Revlon Consumer Products Corp. 2 950.0 CCC+ Negative
StoneMor Partners L.P. 1 385.0 CCC+ Negative
Financial institutions
CCF Holdings LLC 1 276.0 CCC+ Negative
CNG Holdings Inc. 1 310.0 B Stable
Navient Corp. 1 300.0 BB- Stable
PHH Mortgage Corp. 1 301.5 B- Negative
Populus Financial Group Inc. 1 315.0 B Stable
Forest products and building materials
Apex Tool Group LLC 1 325.0 B- Stable
Northwest Hardwoods Inc. 2 435.0 CCC Negative
Rayonier A.M. Products Inc. Yes 1 495.6 B- Stable
Health care
Air Methods Corp. 1 500.0 B- Stable
CHS/Community Health Systems Inc. Yes 4 5055.4 CCC+ Stable
Quorum Health Corp. 1 400.0 CCC- Negative
Tennessee Merger Sub Inc. Yes 1 865.0 B- Stable
High technology
Pitney Bowes Inc. 1 375.0 BB+ Stable
Riverbed Technology Inc. 1 392.4 CCC+ Negative
Insurance
One Call Corp. 1 228.0 B- Stable
Unum Group 1 300.0 BBB Stable
Media and entertainment
24 Hour Fitness Worldwide Inc. 1 500.0 B- Negative
Buena Vista Gaming Authority 1 205.0 B- Stable
Cengage Learning Inc. Yes 1 620.0 B- Stable
Exela Intermediate Co. LLC Yes 1 1000.0 CCC- Negative
Harland Clarke Holdings Corp. 1 800.0 CCC+ Negative
Lee Enterprises Inc. 1 374.4 B- Stable
LSC Communications Inc. 1 450.0 CCC+ Negative
McGraw-Hill Global Education Holdings LLC 1 400.0 B Stable
WeWork Cos. LLC 1 669.0 B- Negative
Metals, mining and steel
CONSOL Energy Inc. 1 239.2 B+ Stable
Hi- Crush Inc. 1 450.0 CCC+ Negative
Oil and gas
AMID Finance Corp. Yes 1 425.0 B Stable
Antero Resources Corp. 1 750.0 BB Negative
Basic Energy Services Inc. 1 300.0 B- Negative
Bruin E&P Partners, LLC 1 600.0 B- Stable
Calfrac Holdings LP Yes 1 650.0 B- Stable
California Resources Corp. 2 244.0 CCC+ Negative
Chaparral Energy Inc. 1 300.0 CCC+ Negative
Denbury Resources Inc. 4 700.7 CCC+ Negative
Ensco International Inc. 1 112.1 CCC+ Negative
Extraction Oil & Gas Inc. 2 950.0 B- Negative
Forum Energy Technologies Inc. 1 400.0 B- Negative
FTS International Inc. 2 404.9 CCC+ Negative
Great Western Finance Corp. Yes 1 300.0 B- Stable
Gulfport Energy Corp. 4 1997.5 B+ Stable
ION Geophysical Corp. 2 127.1 CCC+ Stable
Jonah Energy LLC 1 600.0 CCC+ Negative
KLX Energy Services Holdings, Inc. 1 250.0 B- Stable
Lonestar Resources America Inc. 1 250.0 B- Stable
Moss Creek Resources Holdings, Inc. 2 1200.0 B Stable
Nine Energy Service Inc. 1 400.0 B- Stable
Pioneer Energy Services Corp. 1 300.0 CCC- Negative
Pride International Inc. Yes 1 300.0 CCC+ Stable
Rowan Cos. Inc. 4 1579.4 CCC+ Negative
Unit Corp. 1 650.0 CC Negative
Vine Oil & Gas LP 2 880.0 CCC+ Negative
Whiting Petroleum Corp. 2 1408.2 BB- Negative
Retail/restaurants
Beverages & More Inc. 1 190.0 CCC+ Negative
Guitar Center Inc. 1 311.0 CCC+ Negative
J.C. Penney Co. Inc. 3 822.3 CCC Negative
J.C. Penney Corp. Inc. 2 788.3 CCC Negative
Neiman Marcus Group LTD LLC 5 1915.6 CCC Negative
Party City Holdings Inc. 1 500.0 B Negative
The Fresh Market 1 800.0 CCC Negative
The Neiman Marcus Group LLC 1 125.0 CCC Negative
Telecommunications
Frontier Communications Corp. 16 10670.9 CCC- Negative
GTT Communications Inc. 1 575.0 B- Negative
HC2 Holdings Inc. 1 470.0 B- Stable
Trilogy International Partners LLC 1 350.0 B Stable
Uniti Group Inc. 1 1110.0 CCC- Negative
West Corp. 1 1150.0 B- Stable
Transportation
Flexi-Van Leasing Inc. 1 300.0 CCC Negative
Navios Acquisition Finance (US) Inc. 1 670.0 B- Stable
XO Management Holding Inc. 1 550.0 B+ Stable
Utilities
Ferrellgas Finance Corp. Yes 3 1475.0 CCC- Negative
Martin Midstream Partners L.P. 1 373.6 B- Developing
Summit Midstream Finance Corp. Yes 1 500.0 BB- Stable
Talen Energy Supply LLC 3 163.3 B+ Negative
*Issuer rating used are of a related entity. Data as of Dec. 31, 2019. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.

Related Research

  • Coronavirus Impact: Key Takeaways From Our Articles, Feb 4, 2020
  • Few Corporate Defaults In 2018, But Pockets Of Distress Have Since Emerged, July 23, 2019
  • U.S. Corporate Defaults Have Spiked This Year, July 18, 2019
  • For The U.S. Expansion, Are Trade Troubles "Just A Flesh Wound"?, June 25, 2019
  • U.S. Biweekly Economic Roundup: The Fed Loses "Patience", June 22, 2019
  • With Some Lingering Risks, The U.S. Speculative-Grade Corporate Default Rate Is Set To Rise To 2.7% By March 2020, June 3, 2019

This report does not constitute a rating action.

Credit Markets Research:Nicole Serino, Associate, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Sudeep K Kesh, Senior Director, New York (1) 212-438-7982;
sudeep.kesh@spglobal.com
Research Assistant:Sundaram Iyer, Mumbai

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