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COMMENTS

Credit Trends: Risky Credits: The 'CCC' Category Leads Speculative-Grade Net Upgrades

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2023 Short-Term Corporate Default And Rating Transition Study

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Default, Transition, and Recovery: Global Speculative-Grade Corporate Default Rate To Decline To 3.5% By September 2025


Credit Trends: Risky Credits: The 'CCC' Category Leads Speculative-Grade Net Upgrades

(Editor's Note: Our "Risky Credits" series focuses on U.S. and Canadian 'CCC' rated corporate issuers, as well as their first cousins rated 'B-'. Because the majority of defaults are from companies rated in the 'CCC' category, these 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.)

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On This Month's Front Burner

Net upgrades are highest in the 'CCC' rating category.

Upgrades have far outpaced downgrades in the 'CCC' rating category for the sixth consecutive month as 'CCC' net upgrades (upgrades minus downgrades) remain the highest among all other rating categories (see chart 1). Although recovering, the number of 'CCC' rated issuers remains higher than it was pre-pandemic (137), as downgrades into the rating category in 2020 still outweigh the upgrades. In May 2021, the upgrades out of the 'CCC' category were distributed across sectors, with two upgrades each from the capital goods, health care, and retail/restaurants sectors, and one each from chemicals, packaging, and environmental services; consumer products; forest products and building materials; and oil and gas. The downgrade rate (defined as the number of 'CCC' category and below rated downgrades divided by the total rating actions to and from the 'CCC' rating category) ticked up to 29% in May (see chart 2).

'CCC' issuance is 1.5x 2020 year-to-date and 'B/B-' is 3x.

Favorable market conditions, even at the lower rating levels, have allowed U.S. and Canadian 'CCC' and below rated corporate bond issuance for May 2021 to reach US$4.5 billion. Although a slight dip from the US$5.9 billion in April, year-to-date issuance is still 150% higher than at this point last year. Meanwhile, 'B' rated issuance (excluding 'B+' ratings) through May stood a little over three times higher than at that point in 2020.

Defaults continue to slow.

There were only two defaults from the region in May, the lowest monthly tally since December 2018, and the U.S. default rate continues to slow. With these defaults, the North American total so far 2021 is 25, less than half of last year's year-to date total of 66. The U.S. speculative grade default rate is expected to fall to 4% by March 2022. (see "The U.S. Speculative-Grade Corporate Default Rate Could Fall To 4% By March 2022", May 26, 2021).

Transitioning to 'CCC' slows to a crawl.

Transitions into the 'CCC' rating category from 'B-' remained low at only 1.3% in May 2021 while transitions into 'B-' from 'B' ratings grew only slightly to 0.2% (this is, however, meager compared to the 2.2% long-term weighted average). The negative bias--issuers with a negative outlook or CreditWatch placement with negative implications--of 'CCC' rated issuers has lowered to 71%, the lowest since 2015. The negative bias for 'B-' rated issuers has also dropped slightly to 18% in May 2021, the lowest since September 2019.

Spreads do not reflect inflation concerns.

U.S. 'CCC' and 'B' composite spreads were largely steady in May 2021 with 'CCC' spreads widening slightly to 626 basis points (bps), and the 'B' spread narrowing further to 397 bps. If there are rising concerns of inflation, they are not being reflected in the numbers.

Bids recover.

The average bid of 'B' rated loans has improved slightly since our last report to 99.3, as of May 28, 2021, while the bid for 'CCC' rated loans has increased to 92.2.

Media and entertainment and tech remain most CCC exposed.

By debt amount, much of 'CCC' sector exposure is in the media and entertainment and high technology sectors, with US$47 billion and US$43 billion each. However, in the high technology sector, debt is spread across a small number of issuers. The media and entertainment and consumer products sectors hold the highest 'CCC' exposure by issuer count with 74% and 88% on negative bias and at risk for further downgrade or default.

CLO collateral actions remain positive.

Broadly syndicated loan (BSL) CLOs recorded another month of stable to improving credit metrics in May. While a growing number of CLO exposures are still getting upgraded out of the 'CCC' bucket, the pace of 'CCC' exposure reduction slowed somewhat in May partially due to some issuers getting upgraded out of the non-perform category and into the 'CCC' category in May. Across the 2021 CLO Insights BSL Index, the proportion of CLO exposures with a negative rating bias--Outlook negative or CreditWatch negative--continues to decline to new lows for the year, down to 23.0% and 0.5%, respectively, from 32.4% and 1.6% at the start of the year (see table 3).

Chart 1

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Chart 2

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Chart 11

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Table 1

Top 20 Rating Changes To 'CCC' From 'B-' By Debt Amount (Beginning 2020)
Rating date Issuer Country Sector Rating to Rating from Debt amount (mil. US$)
4/15/2020 Finastra Ltd. Cayman Islands High technology CCC+ B- 36,029
4/13/2020 Endeavor Operating Company, LLC United States Media and entertainment CCC+ B 10,840
3/24/2020 Bombardier Inc. Canada Aerospace and defense CCC+ B- 9,287
3/6/2020 Whiting Petroleum Corp. United States Oil and gas exploration and production CCC+ BB- 6,437
4/17/2020 First Quantum Minerals Ltd Canada Metals, mining and steel CCC+ B- 6,000
7/21/2020 Clear Channel Outdoor Holdings Inc. United States Media and entertainment CCC+ B- 5,835
4/2/2020 AMC Entertainment Holdings Inc. United States Media and entertainment CCC- B 5,569
4/27/2020 Hertz Global Holdings Inc. United States Transportation CCC- B- 5,050
11/24/2020 NGL Energy Partners LP United States Utility CCC+ B+ 4,100
4/1/2020 MEG Energy Corp. Canada Oil and gas exploration and production CCC+ B+ 3,750
5/14/2020 Nabors Industries Ltd Bermuda Oil and gas exploration and production CCC+ B- 3,725
4/10/2020 GTT Communications, Inc. United States Telecommunications CCC+ B- 3,415
3/19/2020 Party City Holdings, Inc. (PC Nextco Holdings LLC) United States Retail/Restaurants CCC+ B 3,401
4/8/2020 Advantage Solutions Inc. United States Consumer products CCC+ B- 3,345
1/27/2021 Viking Cruises Ltd. (Viking Holdings Ltd) United States Media and entertainment CCC+ B- 3,225
4/8/2020 Varsity Brands Holding Co Inc. United States Consumer products CCC+ B- 2,800
3/27/2020 CDS Group Canada Media and entertainment CCC- B- 2,745
5/25/2021 GEO Group (The) Inc. United States Consumer products CCC+ B 2,734
3/30/2020 Ascent Resources Utica Holdings, LLC United States Oil and gas exploration and production CCC+ B 2,700
9/4/2020 Cengage Learning Holdings II Inc. United States Media and entertainment CCC+ B- 2,580
Data as of May 31, 2021. Source: S&P Global Ratings.

Table 2

Top 20 Rating Upgrades From 'CCC' Category (Beginning 2020)
Rating date Issuer Country Sector Rating to Rating from
10/7/2020 Uniti Group Inc. U.S. Telecommunications B- CCC-
4/29/2021 Endeavor Operating Company, LLC U.S. Media and entertainment B CCC+
1/21/2021 NGL Energy Partners LP U.S. Utility B CCC+
4/9/2021 First Quantum Minerals Ltd Canada Metals, mining and steel B CCC+
4/15/2021 MEG Energy Corp. Canada Oil and gas B+ CCC+
12/15/2020 McGraw-Hill Education, Inc. U.S. Media and entertainment B- CCC+
1/21/2021 Petco Holdings Inc. U.S. Retail/restaurants B- CCC+
3/24/2021 SM Energy Company U.S. Oil and gas B- CCC+
2/10/2021 Cengage Learning Holdings II Inc. U.S. Media and entertainment B- CCC+
11/30/2020 CT Technologies Intermediate Holdings Inc. U.S. Media and entertainment B- CCC+
3/3/2021 Kenan Advantage Group Inc. U.S. Transportation B- CCC+
7/21/2020 Kronos Acquisition Holdings Inc. U.S. Consumer products B- CCC+
10/30/2020 Advantage Solutions Inc. U.S. Consumer products B CCC+
3/16/2021 FXI Holdings, Inc. U.S. Chemicals, packaging and environmental services B- CCC+
1/7/2021 Urban One, Inc. U.S. Media and entertainment B- CCC
9/25/2020 New Academy Holding Co. LLC U.S. Retail/restaurants B- CCC+
3/31/2021 Priority Holdings, LLC (Priority Technology Holdings, Inc.) U.S. High technology B- CCC+
3/29/2021 Vine Oil & Gas LP (Vine Energy Inc.) U.S. Oil and gas B- CCC+
8/31/2020 LTI Holdings, Inc. U.S. Capital goods B- CCC+
2/18/2021 Mohegan Tribal Gaming Authority U.S. Media and entertainment B- CCC+
Data as of May 31, 2021. Source: S&P Global Ratings.

Table 3

CLO Insights 2021 Broadly Syndicated Loan Index Metrics (%)
'B-' bucket 'CCC' bucket Non-perform bucket CreditWatch negative Outlook negative
Jan-21 25 8 1 2 32
Feb-21 25 8 1 1 32
Mar-21 25 8 0 1 30
Apr-21 25 7 0 1 26
May-21 25 7 0 1 25
Jun-21 25 7 0 1 23
Data as of May 31, 2021.

Related Research

This report does not constitute a rating action.

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