Key Takeaways
- The U.S. distress ratio continued its downward trend last month, falling to 2.62% as of May 17, its lowest since October 2007.
- The 32.6 percentage point decline in the distress ratio since March 2020 represents the sharpest recovery since we began tracking the distress ratio.
- Favorable financing conditions since second-quarter 2020 have shifted the ratings distribution of distressed credits, with the percentage of 'B' and 'BB' rated credits falling to approximately 40% from 75%.
Chart 1
S&P Global Ratings' U.S. distress ratio--the proportion of speculative-grade (rated 'BB+' or lower) issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries--fell to 2.6% as of May 17, 2021, from 2.9% as of April 30, 2021, reaching its lowest since October 2007. The 32.6 percentage point decline in the distress ratio since March 2020 (from 35.2%) represents the sharpest recovery since we began tracking the distress ratio.
The composition of distressed credits has also changed considerably over this period, with the percentage of 'B' and 'BB' rated credits falling to approximately 40% from 75%, while the percentage of 'CCC' credits has risen in the same period to approximately 60% from 30%.
Much of the tightening in the distress ratio can be attributed to the narrowing of speculative-grade composite spreads to seven-year lows (see chart 3), fueled by accommodative financing conditions and an improved economic outlook. The 'CCC' composite spread, for instance, narrowed in May to 614 bps from highs in March 2020 of over 1,800 bps, as investors' relentless search for yield continued. Additionally, the concerted and swift policy actions of the Federal Reserve were not enough to protect some distressed issuers, whose defaults over the past 12 months have also contributed to the fall in the distress ratio.
Chart 2
Chart 3
Lowering Our U.S. Speculative-Grade Default Forecast
The distress ratio is a leading indicator of the speculative-grade default rate, and the rise in the distress ratio in the first quarter of 2020 preceded a rise in defaults among speculative-grade rating categories. The 12-month trailing default rate for 'CCC'/'C' rose to a peak of 49.7% at the start of 2021, and we saw similar rises in the 'B' and 'BB' rating categories' default rates, to 3.7% and 1.3%, respectively.
Now a falling distress ratio, strong U.S. economic outlook, and continuously improving positive bias (the proportion of issuers with positive rating outlooks or ratings on CreditWatch with positive implications) have in part led us to revise our default forecast. We currently expect the U.S. trailing-12-month speculative-grade corporate default rate will fall to 4% by March 2022 from 6.3% in March 2021 (see "The U.S. Speculative-Grade Corporate Default Rate Could Fall To 4% By March 2022," May 26, 2021).
Chart 4
Distress Has Receded Across Sectors
We have seen significant drops in distress ratios across sectors. The metals, mining, and steel; insurance; and oil and gas sectors exhibit the highest distress ratios, at 6.56%, 5.56%, and 5.26%, respectively, but these are low in comparison with sector averages at this point in 2020.
The high distress ratio for the insurance sector is primarily because of the relatively low number of issuers with speculative-grade ratings in the sector, rather than any systemic risk. The negative bias (the proportion of issuers with negative rating outlooks or ratings on CreditWatch with negative implications) for the insurance sector, at 8.1%, is far lower than the long-term average of 16.9% (see table 1).
On the other hand, the media and entertainment sector has one of the highest number of distressed credits, at 10--in line with oil and gas sector--and has the highest negative bias among all sectors at 39.7% as of May 17.
Table 1
Credit Stats For The Top Three Distressed Sectors | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
(%) | Current negative bias* | Long-term average of negative bias* | Proportion of 'B-' and lower new issues (trailing three years)§ | Proportion of 'B-' and lower outstanding issuer credit ratings† | ||||||
Metals, mining, and steel | 28.6 | 25.6 | 10 | 33.3 | ||||||
Insurance | 8.1 | 16.9 | 5 | 15.4 | ||||||
Oil and gas | 26.0 | 21.4 | 15 | 53.3 | ||||||
*Negative bias is calculated as the number of U.S. issuers with either negative rating outlooks or ratings on CreditWatch negative divided by the total number of U.S. issuers with either positive, negative, or stable outlooks 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. Data through May 17, 2021. Source: S&P Global Ratings Research. |
Additional Tables
Table 2
Metals, Mining, And Steel; Insurance; And Oil And Gas Have The Highest Distress Ratios | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Distress ratio (%)* | Debt-based distress ratio (%)§ | Number of distressed issues | Total debt affected (mil. $) | Percentage change in distressed credits by sector | ||||||||
Aerospace and defense | 2.70 | 1.89 | 1 | 525 | 0.0 | |||||||
Automotive | 2.63 | 3.30 | 2 | 1,550 | 0.0 | |||||||
Banks and brokers | 0.00 | 0.00 | 0 | 0 | ||||||||
Capital goods | 3.33 | 3.48 | 2 | 1,065 | 0.0 | |||||||
Chemicals, packaging, and environmental services | 0.88 | 1.52 | 1 | 930 | 0.0 | |||||||
Consumer products | 2.27 | 1.20 | 4 | 1,350 | 33.3 | |||||||
Financial institutions | 0.62 | 0.80 | 2 | 559 | 0.0 | |||||||
Forest products and building materials | 0.00 | 0.00 | 0 | 0 | ||||||||
Health care | 0.99 | 1.23 | 1 | 1,026 | 0.0 | |||||||
High technology | 1.96 | 0.60 | 2 | 384 | 0.0 | |||||||
Homebuilders/real estate companies | 3.03 | 1.83 | 3 | 690 | 0.0 | |||||||
Insurance | 5.56 | 2.96 | 2 | 550 | 0.0 | |||||||
Media and entertainment | 3.27 | 4.04 | 10 | 8,143 | 0.0 | |||||||
Metals, mining, and steel | 6.56 | 3.25 | 4 | 1,034 | 0.0 | |||||||
Oil and gas | 5.26 | 5.63 | 10 | 5,390 | (37.5) | |||||||
Retail/restaurants | 2.48 | 1.23 | 3 | 683 | 0.0 | |||||||
Telecommunications | 3.48 | 1.75 | 4 | 2,075 | 33.3 | |||||||
Transportation | 0.00 | 0.00 | 0 | 0 | ||||||||
Utility | 3.56 | 1.45 | 8 | 1,880 | (20.0) | |||||||
Total | 2.62 | 2.24 | 59 | 27,835 | (9.2) | |||||||
*S&P Global Ratings' 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. §Outstanding debt amount associated with distressed issues divided by the total debt outstanding of speculative-grade issues. The distress ratio indicates the level of risk the market has priced into bonds. A rising distress ratio reflects an increased need for capital and often precedes increased defaults when accompanied by a severe and sustained market disruption. Data as of May 17, 2021. Source: S&P Global Ratings Research. |
Table 3
List Of Distressed Credits By Issuer | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
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 | ||||||||||||
Arrow BidCo LLC |
Yes | 1 | 340.0 | B | Stable | |||||||
GEO Group Inc. (The) |
2 | 600.0 | BB- | Negative | ||||||||
Revlon Consumer Products Corp. |
1 | 450.0 | CCC- | Negative | ||||||||
Financial institutions | ||||||||||||
CCF Holdings LLC |
1 | 276.0 | CCC | Negative | ||||||||
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 | 3 | 248.9 | CCC+ | Stable | |||||||
Washington Prime Group L.P. |
1 | 720.9 | CC | Negative | ||||||||
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 | |||||||
Staples Inc. |
1 | 1,000.0 | B | Negative | ||||||||
Vericast Corp. |
1 | 324.0 | CCC+ | Negative | ||||||||
WeWork Cos. LLC |
1 | 669.0 | CCC+ | Negative | ||||||||
Metals, mining, and steel | ||||||||||||
CONSOL Energy Inc. |
1 | 167.1 | B- | Negative | ||||||||
Peabody Energy Corp. |
2 | 560.3 | 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 | ||||||||
Forum Energy Technologies Inc. |
1 | 315.5 | CCC+ | 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 | ||||||||
HighPoint Resources Corp. |
2 | 625.0 | CC | Negative | ||||||||
KLX Energy Services Holdings Inc. |
1 | 250.0 | CCC+ | Stable | ||||||||
Laredo Petroleum Inc. |
2 | 1,000.0 | B- | Negative | ||||||||
Moss Creek Resources Holdings Inc. |
2 | 1,200.0 | CCC+ | Negative | ||||||||
Nabors Industries Inc. |
4 | 1,245.5 | CCC+ | Negative | ||||||||
Talos Production Finance Inc. |
Yes | 1 | 600.0 | B- | Stable | |||||||
Vine Oil & Gas LP |
2 | 880.0 | CCC+ | Negative | ||||||||
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 |
1 | 80.7 | B- | Stable | ||||||||
Exterran Energy Solutions L.P. |
1 | 375.0 | B+ | Stable | ||||||||
NGL Energy Finance Corp. |
Yes | 2 | 766.3 | B | Negative | |||||||
PBF Finance Corp. |
Yes | 4 | 2,975.0 | 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 |
4 | 663.3 | B | Negative | ||||||||
This list excludes companies with confidential ratings. Data as of May 17, 2021. Source: S&P Global Ratings Research. |
Related Research
- The S&P/LSTA Leveraged Loan Index Default Rate Forecast For Year-End 2021 Falls To 2.75%, April 20, 2021
- U.S. Speculative-Grade Corporate Default Rate Forecast For Year-End 2021 Falls To 5.5%, March 30, 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 Contributor: | Abhik Debnath, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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