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Credit Trends: The U.S. Distress Ratio Drops To Its Lowest Level In 14 Years

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Credit Trends: U.S. Corporate Bond Yields As Of Jan. 8, 2025

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Credit Trends: U.S. Corporate Bond Yields As Of Dec. 11, 2024

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Credit Trends: The U.S. Distress Ratio Drops To Its Lowest Level In 14 Years

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

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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

image

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

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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