Key Takeaways
- The U.S. distress ratio decreased to 7.4% as of Dec. 31, 2019, from 8.9% as of Nov. 18, 2019.
- The oil and gas sector leads, with a distress ratio of 27.8%, which is almost four times the overall distress ratio.
- Along with the oil and gas sector, telecommunications also has higher current negative bias above its long-term negative bias, indicating heightened short-term risk (see table 1).
- The U.S. speculative-grade energy default rate has increased in 2019 to its current level of 9.1% (see chart 3).
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.
Chart 1
Chart 2
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
Chart 4
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.
Additional Exhibits
Chart 6
Chart 7
Chart 8
Chart 9
Chart 10
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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