Key Takeaways
- The U.S. distress ratio dropped to 3.4% as of March 31, 2021, the lowest level in almost 14 years and 10x lower than the pandemic peak of March 2020.
- The distress ratio has eased significantly in almost all sectors, though it continues to be highest in the oil and gas sector, which has a distress ratio of 10.7%, and the insurance sector has experienced a sharp increase since the start of 2021.
- The sectors that have seen a net increase in distressed debt compared to pre-pandemic levels are metal, mining, and steel; homebuilders and real estate; automotive; insurance; and midstream.
The U.S. distress ratio continued to fall in March, reaching 3.4%--the lowest level since October 2007--after peaking at 35.2% just a year prior. The U.S. distress ratio is the proportion of speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries.
Higher economic growth forecasts and higher inflation expectations have led to an increase in bond yields. As a result, fixed-income investors have struggled to generate positive returns, with the improved outlook spurring demand for lower-rated speculative-grade bonds and the positive returns they continued to generate in the first quarter. Even as Treasury yields increased, secondary market yields for speculative-grade corporate issuers have remained at a two-year low at 370 bps as of March 31. Credit spreads at the 'CCC and below' rating level at 643 bps as of March 31 are almost one-third of their 2020 peak.
Chart 1
Meanwhile, the U.S. speculative-grade default ratio continues to show signs of slowing, having fallen slightly to 6.3% in March 2021 from 6.4% in February 2021. The slowing is due to positive economic indicators, declines in U.S. corporate negative bias across most sectors, and a full 12 months of declines in the distress ratio. Despite a decrease in the overall distress ratio, the U.S. speculative grade energy default rate remains close to recent peaks, falling slightly to 20.1% in March 2021 from a two-year high of 21.5% as of February 2021 while the negative bias in the sector remains well above its longer-term average (see table 2). S&P Global Ratings Research expects the U.S. trailing-12-month speculative-grade corporate default rate to fall to 5.5% by December 2021 (see "U.S. Speculative-Grade Corporate Default Rate Forecast For Year-End 2021 Falls To 5.5%," March 30, 2021).
Chart 2
The Distress Ratio Has Improved Across Most Sectors
As borrowing conditions remain largely favorable across sectors, many sectors' distressed ratios are lower than they were at this point in 2020 (see chart 3). Although improving substantially from March highs of 95.3%, the oil and gas sector still has the highest distress ratio with 10.7%. The metals, mining, and steel; homebuilders and real estate; automotive; and midstream sectors also continue to feel the impacts of the pandemic and have higher distress ratios than they did at this point last year. Curiously, the distress ratio for the insurance sector--which has experienced limited actions since the pandemic began--has more than doubled since the start of the year and is higher now than before the pandemic. However, this is largely explained by the relatively low number of issuers with speculative-grade ratings in the sector rather than any systemic risk. The negative bias for the insurance sector at 7.8% remains well below its long-term average.
Table 1
Most Sectors Have A Lower Distressed Debt Ratio Than They Did Before The Pandemic | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sectors\Distressed Ratio (%)* | Start Of 2020 | 2020 Peak--March 31, 2020 | Start Of 2021 | Current | ||||||
Aerospace and defense | 5.00 | 25.00 | 1.91 | 2.70 | ||||||
Automotive | 0.00 | 51.72 | 4.24 | 2.70 | ||||||
Banks and brokers | 0.00 | 7.14 | 0.00 | 0.00 | ||||||
Capital goods | 4.69 | 20.97 | 3.38 | 3.00 | ||||||
Chemicals, packaging, and environmental services | 0.00 | 18.81 | 2.32 | 0.90 | ||||||
Consumer products | 3.08 | 19.08 | 1.58 | 2.30 | ||||||
Financial institutions | 3.36 | 54.05 | 1.17 | 0.60 | ||||||
Forest products and building materials | 9.30 | 27.91 | 0.00 | 0.00 | ||||||
Health care | 7.45 | 21.51 | 2.72 | 1.00 | ||||||
High technology | 2.04 | 11.11 | 1.33 | 1.90 | ||||||
Homebuilders/real estate co. | 0.00 | 13.19 | 2.97 | 2.80 | ||||||
Insurance | 6.06 | 13.33 | 3.21 | 8.30 | ||||||
Media and entertainment | 3.75 | 24.07 | 4.61 | 2.90 | ||||||
Metals, mining, and steel | 3.57 | 40.98 | 5.98 | 6.80 | ||||||
Oil and gas | 27.81 | 95.30 | 13.85 | 10.70 | ||||||
Retail/restaurants | 18.99 | 48.51 | 1.55 | 2.50 | ||||||
Telecommunications | 15.33 | 9.84 | 1.76 | 3.60 | ||||||
Transportation | 6.98 | 45.45 | 4.38 | 0.00 | ||||||
Midstream, merchant power, and independent power producers | 4.91 | 51.15 | 5.63 | 6.20 | ||||||
Total | 7.43 | 39.43 | 3.93 | 3.36 | ||||||
Data as of March 31, 2021. *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. Source: S&P Global Ratings Research. |
Table 2
The Oil And Gas Sector's Negative Bias Remains Well Above Its Long-Term Average | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Credit stats for the top three distressed sectors (%) | ||||||||||
Current Negative Bias* | Long-Term Average of Negative Bias* | Proportion of B- & Below New Issues (Trailing Three Years)§ | Proportion of B- & Below Outstanding Issuer Ratings† | |||||||
Oil and gas | 53.8 | 23.8 | 14.9 | 55.0 | ||||||
Insurance | 7.6 | 20.7 | 5.6 | 14.8 | ||||||
Metals, mining, and steel | 37.0 | 26.8 | 11.4 | 32.5 | ||||||
Data as of March 31, 2021. *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. |
Additional Exhibits:
Table 3
Oil And Gas, Media And Entertainment, And Utilities Account For Two-Thirds Of The Distressed Debt | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Distressed Ratio (%)* | Debt Based Distressed Ratio (%) | Number of Distressed Issues | Total Debt Affected (Mil. $) | Percent Change Of Distressed Credits By Sector | ||||||||
Aerospace and defense | 2.70 | 1.90 | 1 | 525 | - | |||||||
Automotive | 2.70 | 3.40 | 2 | 1,550 | - | |||||||
Banks and brokers | ||||||||||||
Capital goods | 3.00 | 3.10 | 2 | 1,065 | - | |||||||
Chemicals, packaging, and environmental services | 0.90 | 1.50 | 1 | 930 | - | |||||||
Consumer products | 2.30 | 1.20 | 4 | 1,350 | - | |||||||
Financial institutions | 0.60 | 0.80 | 2 | 559 | (33) | |||||||
Forest products and building materials | 0.00 | 0.00 | ||||||||||
Health care | 1.00 | 1.30 | 1 | 1,026 | - | |||||||
High technology | 1.90 | 0.60 | 2 | 385 | - | |||||||
Homebuilders/real estate co. | 2.80 | 1.70 | 3 | 690 | (50) | |||||||
Insurance | 8.30 | 3.10 | 3 | 553 | - | |||||||
Media and entertainment | 2.90 | 3.90 | 9 | 7,893 | (18) | |||||||
Metals, mining, and steel | 6.80 | 3.50 | 4 | 1,034 | 33 | |||||||
Oil and gas | 10.70 | 9.70 | 21 | 9,215 | (28) | |||||||
Retail/restaurants | 2.50 | 1.30 | 3 | 683 | - | |||||||
Telecommunications | 3.60 | 1.70 | 4 | 1,925 | - | |||||||
Transportation | 0.00 | 0.00 | ||||||||||
Utility | 6.20 | 3.70 | 14 | 4,719 | - | |||||||
Total | 3.36 | 2.79 | 76 | 34,101 | (15) | |||||||
Data as of March 31, 2021. *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. Source: S&P Global Ratings Research. |
Table 4
List Of Distressed Credits By Issuers | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Sector/Company | Issuer Ratings Are For A Related Entity | Issue Count | Outstanding Amount (Mil. $) | Rating | Outlook/ CreditWatch | |||||||
Aerospace and defense | ||||||||||||
Wesco Aircraft Holdings Inc. | 1 | 525.0 | CCC+ | Negative | ||||||||
Automotive | ||||||||||||
Ford Motor Co. | 2 | 1,550.0 | BB+ | Negative | ||||||||
Capital goods | ||||||||||||
Ahern Rentals Inc. | 1 | 550.0 | CCC+ | Negative | ||||||||
Aptim Corp. | 1 | 515.0 | CCC+ | Stable | ||||||||
Chemicals, packaging and environmental services | ||||||||||||
TPC Group Inc., | 1 | 930.0 | CCC | Negative | ||||||||
Consumer products | ||||||||||||
GEO Group Inc. (The) | 3 | 900.0 | BB- | Negative | ||||||||
Revlon Consumer Products Corp. | 1 | 450.0 | CCC- | Negative | ||||||||
Financial institutions | ||||||||||||
CNG Holdings Inc. | 1 | 259.0 | B | Negative | ||||||||
Navient Corp. | 1 | 300.0 | BB- | Negative | ||||||||
Health care | ||||||||||||
Envision Healthcare Corp. | 1 | 1,026.4 | CCC | Negative | ||||||||
High technology | ||||||||||||
Pitney Bowes Inc. | 1 | 375.0 | BB | Stable | ||||||||
Riverbed Technology Inc. | 1 | 9.5 | CCC+ | Negative | ||||||||
Homebuilders/real estate companies | ||||||||||||
Diversified Healthcare Trust | 2 | 600.0 | BB- | Negative | ||||||||
K. Hovnanian Enterprises Inc. | Yes | 1 | 90.0 | CCC+ | Stable | |||||||
Insurance | ||||||||||||
Assurant Inc. | 1 | 250.0 | BBB | Stable | ||||||||
One Call Corp. | 1 | 2.7 | B- | Negative | ||||||||
Unum Group | 1 | 300.0 | BBB | Stable | ||||||||
Media and entertainment | ||||||||||||
AMC Entertainment Holdings Inc. | 3 | 1,646.3 | CCC- | Negative | ||||||||
AMC Entertainment Inc. | Yes | 1 | 98.3 | CCC- | Negative | |||||||
Diamond Sports Group LLC | 3 | 4,824.8 | CCC+ | Negative | ||||||||
Exela Intermediate Co. LLC | Yes | 1 | 1,000.0 | CCC- | Negative | |||||||
Vericast Corp. | 1 | 324.0 | CCC+ | Negative | ||||||||
Metals, mining, and steel | ||||||||||||
AU Holdings LLC | 1 | 193.9 | CCC+ | Negative | ||||||||
CONSOL Energy Inc. | 1 | 167.1 | B- | Negative | ||||||||
Peabody Energy Corp. | 2 | 672.6 | CCC+ | Negative | ||||||||
Oil and gas | ||||||||||||
Anadarko Petroleum Corp. | 1 | 5.0 | BB- | Negative | ||||||||
Basic Energy Services Inc. | 1 | 300.0 | CCC- | Negative | ||||||||
Callon Petroleum Co. | 5 | 1,515.0 | CCC+ | Negative | ||||||||
EnVen Energy Corp. | 1 | 325.0 | B- | Negative | ||||||||
Global Marine Inc. | Yes | 1 | 261.2 | CCC- | Negative | |||||||
Gran Tierra Energy Inc. | 1 | 300.0 | B- | Stable | ||||||||
Gran Tierra Energy International Holdings Ltd. | Yes | 1 | 300.0 | B- | Stable | |||||||
Great Western Petroleum LLC | 1 | 235.0 | CCC- | Watch Positive | ||||||||
KLX Energy Services Holdings Inc., | 1 | 250.0 | CCC+ | Stable | ||||||||
Laredo Petroleum Inc. | 1 | 600.0 | B- | Negative | ||||||||
Moss Creek Resources Holdings Inc., | 2 | 1,200.0 | CCC+ | Negative | ||||||||
Nabors Industries Inc. | 2 | 670.9 | CCC+ | Negative | ||||||||
Talos Production Finance Inc. | Yes | 1 | 600.0 | B- | Stable | |||||||
W&T Offshore Inc. | 1 | 552.5 | CCC+ | Negative | ||||||||
Weatherford International LLC | Yes | 1 | 2,100.0 | CCC | Negative | |||||||
Retail/restaurants | ||||||||||||
Party City Holdings Inc. | 1 | 22.9 | CCC+ | Positive | ||||||||
QVC Inc. | 2 | 660.0 | BB- | Negative | ||||||||
Telecommunications | ||||||||||||
GTT Communications Inc., | 1 | 575.0 | CCC | Negative | ||||||||
Trilogy International Partners LLC | 1 | 350.0 | B- | Stable | ||||||||
United States Cellular Corp. | 2 | 1,000.0 | BB | Stable | ||||||||
Utilities | ||||||||||||
CSI Compressco LP | 2 | 235.7 | B- | Stable | ||||||||
NGL Energy Finance Corp. | Yes | 2 | 766.3 | B | Negative | |||||||
PBF Finance Corp. | Yes | 3 | 1,725.0 | B+ | Negative | |||||||
Ruby Pipeline LLC | 1 | 518.8 | B- | Watch Negative | ||||||||
Summit Midstream Finance Corp. | Yes | 1 | 259.5 | CCC+ | Negative | |||||||
Talen Energy Supply LLC | 5 | 1,213.4 | B | Negative | ||||||||
Data as of Mar. 31, 2021. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research. |
Related Research
- Corporate America not likely to unwind COVID-19 debt buildup despite credit hits, Feb. 22, 2021
- The U.S. Speculative-Grade Corporate Default Rate Could Reach 7% By December 2021, Feb. 19, 2021
This report does not constitute a rating action.
Credit Markets Research: | Nicole Serino, New York + 1 (212) 438 1396; nicole.serino@spglobal.com |
Research Assistant: | Sundaram Iyer, Mumbai |
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