(Editor's Note: In response to investors' sharp focus on U.S. and Canadian 'CCC' rated nonfinancial and financial corporate issuers, as well as their first cousins rated 'B-', S&P Global Ratings launched the "Risky Credits" series in April 2020. It is published monthly to provide insight on credit trends and potential risks affecting 'B-' and 'CCC' rated corporate issuers. Because 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 companies with negative outlooks or ratings on CreditWatch negative are even more important to monitor in this unprecedented downturn and uncertain recovery. On June 29, 2020, we corrected this article to reflect that the number of 'CCC' category rated corporate issuers, as opposed to just 'CCC+' rated corporate issuers, has nearly doubled since February.)
Key Takeaways
- The number of corporate issuers in the 'CCC' rating category in the U.S. and Canada has nearly doubled (to 256 from 132) since the beginning of February 2020, when the COVID-19 pandemic and rapid deterioration in oil prices began.
- The percentage of companies downgraded to the 'CCC' rating category from 'B-' decreased in May to 3.1%, but the three-month average remains at an all-time high of 10.3%.
- The U.S. speculative-grade composite spread narrowed by over 14% in May, continuing its path to normalcy since reaching a high of 1,046 basis points in late March.
- The U.S. speculative-grade 12-month trailing default rate increased to 4.7% as of May 31, 2020. There were 26 defaults globally in the month among companies previously rated in the 'CCC' and 'CC' rating categories (half of which were selective defaults).
On This Month's Front Burner
Negative actions peak: After peaking in late March, the number of negative rating actions both globally and in North America has slowed as S&P Global Ratings has reviewed many of its ratings. The percentage of U.S. and Canadian companies downgraded to the 'CCC' rating category from 'B-' decreased in May to 3.1%, but the three-month average remains at an all-time high of 10.3%, and the number of companies in the 'CCC' rating category has nearly doubled since the beginning of February 2020, when the COVID-19 pandemic and rapid deterioration in oil prices began. Issuers in the 'CCC' category have an unsustainable capital structure and therefore are particularly vulnerable to default; their historical default rates from 1981 through first-quarter 2020 are 11x higher than those in the 'B' category. Now, as social distancing measures aimed at curbing the spread of COVID-19 allow economies to begin reopening, we think the recovery will likely be slow and vary by sector. For more information, see "COVID-19 Impact: Key Takeaways From Our Articles."
Risk across industries varies: Issuers directly affected by social distancing measures have been more exposed to credit deterioration, both within the 'B-' and lower rating categories as well as in general. The media and entertainment sector (largely made up of hotels, gaming, and leisure companies) leads in 'B-' rated issuers as the sector feels the compounding effects of a relatively weak ratings profile before the pandemic and a substantive decline in revenue for many issuers due to COVID-19-related travel restrictions and the need to tap markets--therefore increasing leverage--to help survive the temporary dislocation. The sector also experienced an increase in negative bias (the proportion of issuers with negative outlooks or ratings on CreditWatch negative) since April.
Spreads narrow: The U.S. speculative-grade composite spread narrowed by over 14% in May, continuing its path to normalcy since reaching a high of 1,046 basis points (bps) in late March. Nevertheless, spreads remain elevated at 646 bps currently, compared with 449 bps at the beginning of 2020, reflecting continued risk aversion for speculative-grade issuers most deeply affected by COVID-19-related rating actions, oil dislocations, and elevated business, financial, and default risks. Despite elevated spreads compared with the beginning of the year, speculative-grade issuance is expected to hit record levels in June, while loan volumes are expected to lag.
For the lowest ratings, default risk is high: There were 26 global corporate defaults in May, 15 of which were U.S.-based, and each defaulter was previously rated in the 'CCC' or 'CC' rating category. Half were selective defaults. The U.S. default rate picked up to 4.7% as of May 31, 2020, and we expect it to keep climbing given challenging credit and financing conditions.
Bankruptcy defaults rise: The percentage of defaulting issuers that filed for Chapter 11 increased in May to 27%, compared with 20% in the previous month, as companies directly affected by COVID-19 began to resort to bankruptcy as a way to solvency, in the absence of meaningful risk appetite among investors for primary lending at palatable rates.
The loan default rate rises: According to S&P Global Market Intelligence's Leveraged Commentary & Data, the U.S. leveraged loan default rate rose in May 2020 to 3.2%, compared with only 1% in May 2019.
CLO collateral actions: Since early March, we have downgraded or placed on CreditWatch negative just under 30% of collateral for U.S. broadly syndicated loan collateralized loan obligations (CLOs) (in comparison, about 40% of U.S. and Canadian corporate and sovereign issuer ratings have been affected by COVID-19 and oil prices). The 'CCC' buckets are now just under 12%, and 437 tranches across 317 CLO transactions are currently on CreditWatch negative.
Chart 1
Chart 2
Chart 3
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
Chart 9
Top Rating Changes To 'CCC' From 'B-' By Debt Amount (Year To Date) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating date | Issuer | Country | Sector | Rating to | Rating from | Debt amount (mil. US$) | ||||||||
3/24/2020 |
Bombardier Inc. |
Canada | Aerospace and defense | CCC+ | B- | 9,287 | ||||||||
4/17/2020 |
First Quantum Minerals Ltd. |
Canada | Metals, mining, and steel | CCC+ | B- | 6,000 | ||||||||
4/27/2020 |
Hertz Global Holdings Inc. |
U.S. | Transportation | CCC- | B- | 5,050 | ||||||||
4/10/2020 |
GTT Communications Inc. |
U.S. | Telecommunications | CCC+ | B- | 3,415 | ||||||||
4/8/2020 |
Advantage Solutions Inc. |
U.S. | Consumer products | CCC+ | B- | 3,345 | ||||||||
4/8/2020 |
Varsity Brands Holding Co. Inc. |
U.S. | Consumer products | CCC+ | B- | 2,800 | ||||||||
3/27/2020 |
CDS Group |
Canada | Media and entertainment | CCC- | B- | 2,745 | ||||||||
4/30/2020 |
SM Energy Co. |
U.S. | Oil and gas exploration and production | CC | B- | 2,300 | ||||||||
1/3/2020 |
Aveanna Healthcare LLC |
U.S. | Health care | CCC+ | B- | 2,091 | ||||||||
4/23/2020 |
FXI Holdings Inc. |
U.S. | Chemicals, packaging, and environmental services | CCC+ | B- | 2,075 | ||||||||
4/8/2020 |
Helix Acquisition Holdings Inc. |
U.S. | Capital goods | CCC+ | B- | 2,055 | ||||||||
4/17/2020 |
Life Time Inc. |
U.S. | Media and entertainment | CCC+ | B- | 1,984 | ||||||||
6/12/2020 |
AVSC Holding Corp. |
U.S. | Media and entertainment | CCC | B- | 1,980 | ||||||||
4/23/2020 |
Syniverse Holdings Inc. |
U.S. | Telecommunications | CCC+ | B- | 1,922 | ||||||||
5/11/2020 |
Callon Petroleum Co. |
U.S. | Oil and gas exploration and production | CC | B- | 1,900 | ||||||||
5/8/2020 |
Mohegan Tribal Gaming Authority |
U.S. | Media and entertainment | CCC+ | B- | 1,876 | ||||||||
3/30/2020 |
Flexential Intermediate Corp. |
U.S. | Telecommunications | CCC+ | B- | 1,760 | ||||||||
3/25/2020 |
LTI Holdings Inc. |
U.S. | Capital goods | CCC+ | B- | 1,740 | ||||||||
Data as of June 15, 2020. Source: S&P Global Ratings. |
Related Research
- U.S. CLO Exposure To Negative Corporate Rating Actions (As Of June 14, 2020), June 16, 2020
- Historically Low Ratings In The Run-Up To 2020 Increase Vulnerability To The COVID-19 Crisis, May 28, 2020
- Risky Credits: Hanging On The Edge, May 26, 2020
- Transportation Leads Distress Ratios As Demand Collapses Across U.S. Sectors, May 26, 2020
- More Than One-Quarter Of Speculative-Grade Issuers Are Weakest Links, May 14, 2020
- U.S. Biweekly Economic Roundup: With Unprecedented Job Losses, Unemployment Soars, May 8, 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. Corporate Credit Stress Surges To Recession Levels On COVID-19 And Oil Shocks, April 14, 2020
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 Contacts: | Sudeep K Kesh, New York (1) 212-438-7982; sudeep.kesh@spglobal.com |
Ramki Muthukrishnan, New York (1) 212-438-1384; ramki.muthukrishnan@spglobal.com | |
Research Contributors: | Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
Sundaram Iyer, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.