(Editor's note: In response to investors' sharp focus on the U.S. and Canada's 'CCC' rated nonfinancial and financial corporate segment, and their first cousins rated 'B-', S&P Global Ratings launched the "Risky Credits" series in April 2020. It is published monthly to provide more insight on credit trends and potential risks affecting 'B-' and 'CCC' rated issuers. As the majority of defaults are from companies rated in the 'CCC' category (with the exception of distressed exchanges, which are less easily spotted several quarters in advance), 'CCC' and 'B-' rated issuers with negative outlooks or on CreditWatch negative will become even more important to monitor in this unprecedented downturn and uncertain recovery.)
Key Takeaways
- U.S. speculative-grade composite spread narrowed by over 13% in April. Spreads remain elevated in 2020 amid investors' risk aversion, and some think they could return to March highs.
- Default risk is high, up to 3.5% as of March 31, 2020, and more so among the lowest rated companies. There were 21 defaults in April among companies previously rated in the 'CCC' category, but we expect far more.
- Although companies do not immediately resort to bankruptcy, some already faced challenges before the COVID-19 shock. Of the U.S. corporate defaults in April, 52% were due to missed interest payments and only 14% filed for bankruptcy.
- We downgraded or placed on CreditWatch with negative implications more than 28% of collateral for U.S. broadly syndicated loan collateralized loan obligations since March 1, 2020.
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On This Month's Front Burner
Before the coronavirus pandemic, investors' thirst for yield amid low interest rates paved the way for riskier credit. This was significantly amplified by the pandemic and its impact on the economy, financial markets, supply chains, and the direct hit to revenues. The shape of the recovery is uncertain but likely to be relatively slow, compared to the rapid decline. For more information, see "COVID-19 Impact: Key Takeaways From Our Articles", first published Feb. 6, 2020, and continually updated.
U.S. speculative-grade composite spread narrowed by over 13% in April because of Federal Reserve actions and the impact on investor confidence. Spreads remain sizably elevated from the start of the year and account for rampant risk aversion for the majority of investors.
A sharp, sudden recession with an uncertain slope of recovery remains a key risk for speculative-grade companies. For the lowest ratings, default risk is high. There were 21 defaults in April, each company previously rated in the 'CCC' category. The U.S. default rate picked up to 3.5% as of March 31, 2020, and is expected to keep climbing given the challenging credit and financing conditions.
As in the previous economic crisis, companies facing unforeseen financial burdens do not immediately resort to bankruptcy. Rather, they look at out-of-court balance-sheet management options and ways to preserve liquidity. Companies that filed for bankruptcy in 2020 already faced idiosyncratic challenges before the COVID-19 shock, such as The Neiman Marcus Group LLC, J.C. Penney Co. Inc., and J. Crew Group Inc. Of the U.S. corporate defaults in April, 52% were due to missed interest payments and only 14% filed for bankruptcy. It is only a matter of time before many issuers declare bankruptcy to handle debt. There should be an increase in case filings, which might clog the system, and this could further delay the rise in bankruptcy filings.
There were 11 S&P/LSTA Index defaults in April, exceeding the monthly record of 10 in October 2009. By amount, the rate of 2.32% is edging closer to the historical average of 2.9% and marks the highest since April 2018. By issuer count, the April 2.71% default rate is the highest since December 2010.
Since the beginning of March, we downgraded or placed on CreditWatch with negative implications more than 28% of collateral for U.S. broadly syndicated loan collateralized loan obligations (CLO), the 'CCC' buckets tripled to 12.3% from about 4% (though the pace has slowed), and 418 tranches across 316 CLO transactions are on CreditWatch negative.
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Table 1
| Collateralized Loan Obligation Index Metrics | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CLO Insights 2020 Index | ||||||||||||||||||||
| 'B-' (%) | 'CCC' category (%) | Nonperforming category (%) | Junior O/C cushion (%) | Weighted-average price of portfolio | SPWARF | Par change (%) | CreditWatch negative (%) | Negative outlook (%) | ||||||||||||
| Jan 1 | 20.0 | 4.1 | 0.5 | 3.9 | 97.5 | 2,644.0 | - | 1.6 | 17.4 | |||||||||||
| Feb 1 | 20.2 | 4.1 | 0.6 | 3.8 | 97.6 | 2,645.0 | (0.0) | 1.3 | 17.7 | |||||||||||
| Mar 1 | 20.2 | 4.1 | 0.6 | 3.8 | 95.8 | 2,639.0 | (0.1) | 1.6 | 17.2 | |||||||||||
| Mar 20 | 22.9 | 6.9 | 0.7 | 3.7 | 79.5 | 2,753.0 | (0.1) | 8.5 | 18.9 | |||||||||||
| Mar 29 | 23.2 | 8.4 | 0.7 | 3.7 | 80.9 | 2,807.0 | (0.1) | 9.9 | 20.9 | |||||||||||
| Apr 5 | 23.5 | 10.1 | 0.8 | 3.7 | 83.1 | 2,857.0 | (0.1) | 10.7 | 24.4 | |||||||||||
| Apr 12 | 23.9 | 10.9 | 1.4 | 3.7 | 86.2 | 2,923.0 | (0.1) | 10.6 | 27.4 | |||||||||||
| Apr 19 | 23.8 | 11.8 | 1.7 | 3.6 | 87.3 | 2,965.0 | (0.1) | 9.9 | 29.8 | |||||||||||
| Apr 26 | 24.5 | 12.1 | 1.7 | 3.0 | 86.8 | 2,975.0 | (0.2) | 10.1 | 32.2 | |||||||||||
| May 3 | 25.4 | 12.3 | 1.6 | 2.4 | 86.7 | 2,986.0 | (0.2) | 9.8 | 32.6 | |||||||||||
| May 10 | 25.7 | 12.3 | 1.3 | 2.1 | 87.1 | 2,971.0 | (0.3) | 9.2 | 34.2 | |||||||||||
| May 17 | 25.9 | 12.2 | 1.3 | 2.0 | 87.5 | 2,971.0 | (0.3) | 9.3 | 35.0 | |||||||||||
| Note: CLO Insights 2020 Index is an index of 410 S&P Global Ratings rated U.S. broadly syndicated loan CLOs that will be reinvesting for all of 2020. O/C--Overcollateralization. SPWARF--S&P Global Ratings weighted-average rating factor. Source: CLO Insights 2020 Index. | ||||||||||||||||||||
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Related Research
- Over Half Of CLOs In CLO Insights Index Have Ratings On Watch; About 10% Paid Down Senior Notes Due To Interest Diversion, May 15, 2020
- More Than One-Quarter Of Speculative-Grade Issuers Are Weakest Links, May 14, 2020
- U.S. CLO Exposure To Negative Corporate Rating Actions (As Of May 10, 2020), May 12, 2020
- Tighter Financing Conditions Push The U.S. Distress Ratio Above 30%, April 27, 2020
- U.S. Leveraged Finance Q1 2020 Update: Recovery Ratings Face Limited COVID-19 Disruption, April 23, 2020
- Rising Credit Pressures Amid Deeper Recession, Uncertain Recovery Path, April 22, 2020
- U.S. Biweekly Economic Roundup: No Surprise, Severe Disruptions Across The Board Continue, April 17, 2020
- U.S. Corporate Credit Stress Surges To Recession Levels On COVID-19 And Oil Shocks, April 14, 2020
- Risky Credits: Low Creditworthiness In The Time Of Coronavirus, April 7, 2020
- As The 'B-' Universe Expands, Timing Is Everything, Dec. 6, 2019
This report does not constitute a rating action.
| Credit Markets Research: | Nicole Serino, New York + 1 (212) 438 1396; nicole.serino@spglobal.com |
| Leveraged Finance: | Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@spglobal.com |
| Secondary Contact: | Sudeep K Kesh, New York (1) 212-438-7982; sudeep.kesh@spglobal.com |
| Research Contributor: | Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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