(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.)
Key Takeaways
- The number of 'CCC' category ratings on U.S. and Canadian companies declined to a 16-month low of 178 as of June 30, 2021.
- A decrease in distressed exchanges over the past few months has brought down the number of total defaults in the region.
- Accommodative financing conditions have allowed for year-to-date issuance to more than double in the 'B-' and below category to $59 billion (versus $24 billion in 2020).
- Over 70% of 'CCC' rating actions so far in 2021 have been upgrades--the highest among speculative-grade rating categories.
On This Month's Front Burner
A drop in distressed exchanges pushes down default rates
There were only two defaults from the region in June--in line with May and the lowest monthly tally since December 2018. With these defaults, the North American total so far 2021 is 27, less than half of last year's year-to date total of 88. The drop in defaults has been driven by a decrease in distressed exchanges, which have dominated defaults in the region since third-quarter 2020. We estimate the U.S. 12-month-trailing speculative-grade corporate default rate will fall to 3.8% in June 2021 from 4.7% in May 2021 (see " U.S.-Based GTT Communications Inc.'s Default Brings The 2021 Global Corporate Tally To 48 ," July 8, 2021).
Spreads remain tight despite inflationary pressures
North American financing conditions remain accommodative at every rating level, even for 'CCC' category and below issuers whose spreads remain tight despite a surge in inflation in June, weighing on consumer sentiment. U.S. 'CCC' and 'B' composite spreads narrowed slightly to 597 basis points (bps), and 377 bps, respectively. The U.S. economy continues to chug along at a faster pace amid improving mobility and state reopenings across most parts of the country (see " U.S. Real-Time Data: In A Sweet Spot ," July 9, 2021).
'CCC' issuance is at more than 2x 2020 year-to-date levels
Favorable market conditions, even at the lower rating levels, have allowed U.S. and Canadian 'CCC' and below rated corporate bond issuance for June 2021 to reach $30 billion, which is 2.4x higher than at this point in 2020. Meanwhile, 'B' rated issuance (excluding 'B+' ratings) through June stood 2.3x higher than at that point in 2020.
Net upgrades are highest in the 'CCC' rating category
Upgrades continue to far outpace downgrades in the 'CCC' rating category for the sixth consecutive month; '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 prepandemic (137) as downgrades into the rating category in 2020 still outweigh the upgrades. In June 2021, the upgrades out of the 'CCC' category were distributed across sectors, with three upgrades from the health care and one each from consumer products, aerospace and defense, and retail/restaurants. 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 14% in June (see chart 2).
Bids recover
The average bid of 'B' rated loans remained mostly steady since our last report at 99.28, as of June 30, 2021, while the bid for 'CCC' rated loans has rose by 0.55 bps to 92.76.
Media and entertainment and tech remain most exposed
By debt amount, much of 'CCC' sector exposure is in the media and entertainment and high technology sectors, with $46.5 billion and $43.37 billion each. However, in the high tech sector, debt is spread among a small number of issuers. The media and entertainment and consumer products sectors hold the highest 'CCC' exposure by issuer count with 71% and 87%, respectively, on negative bias and at risk for further downgrade or default.
CLOs end the first half of 2021 with positive momentum
Broadly syndicated loan (BSL) collateralized loan obligations (CLOs) finished the first half of 2021 with improving and stable credit metrics relative to the start of the year; pre-COVID CLOs experienced improving credit metrics while post-COVID CLOs continue to show stable performance. The upgrade to downgrade ratio of U.S. BSL CLO exposures remain elevated, with 15 issuers raised out of the 'CCC' category in the first quarter and another 21 issuers in second-quarter 2021. By midyear, most of the pre-COVID CLOs' 'CCC' exposures fell below the 7.5% trigger. In second-quarter 2021, most of the CLOs within the 2021 CLO Insights BSL Index experienced some par gain, reversing some of the par loss in the first quarter. The average index exposure to issuers with a negative outlook has declined to 20.6%, down from 32.4% at the start of the year (see table 3).
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Table 1
Downgrades into 'CCC' category beginning 2021 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating Date | Issuer | Country | Sector | Rating to | Rating from | Debt amount (mil. $) | ||||||||
1/27/2021 | Viking Cruises Ltd. (Viking Holdings Ltd.) | U.S. | Media/entertainment | CCC+ | B- | 3,225 | ||||||||
5/25/2021 | GEO Group (The) Inc. | U.S. | Consumer products | CCC+ | B | 2,734 | ||||||||
4/1/2021 | Epic Crude Services L.P. | U.S. | Utility | CCC+ | B- | 1,175 | ||||||||
5/12/2021 | WaterBridge Operating LLC (WaterBridge Resources LLC) | U.S. | Utility | CCC+ | B- | 1,000 | ||||||||
4/9/2021 | Ruby Pipeline LLC | U.S. | Utility | CCC | B- | 825 | ||||||||
2/26/2021 | Dawn Acquisitions LLC (Infra Colodata Holdings LLC) | U.S. | Telecommunications | CCC | B- | 550 | ||||||||
4/16/2021 | Cornerstone Chemical Co. | U.S. | Chemicals, packaging, and environmental services | CCC+ | B- | 450 | ||||||||
1/25/2021 | PetroChoice Holdings Inc. | U.S. | Consumer products | CCC+ | B- | 435 | ||||||||
6/17/2021 | Salient CRGT Inc. | U.S. | Aerospace & Defense | CCC | B- | 420 | ||||||||
4/8/2021 | BEP Ulterra Holdings Inc. | U.S. | Oil and gas exploration/production | CCC+ | B- | 415 | ||||||||
3/19/2021 | MVK Intermediate Holdings LLC | U.S. | Consumer products | CCC+ | B | 335 | ||||||||
5/11/2021 | Overseas Shipholding Group Inc. | U.S. | Transportation | CCC+ | B- | 325 | ||||||||
1/29/2021 | Terra-Gen Finance Co. LLC (Terra-Gen Power Holding II LLC) | U.S. | Utility | CCC+ | B- | 320 | ||||||||
5/6/2021 | New Constellis Borrower LLC (New Constellis Holdings Inc.) | U.S. | Aerospace/defense | CCC+ | B- | 260 | ||||||||
Data as of June 30, 2021. Source: S&P Global Ratings. |
Table 2
Upgrades From 'CCC' Category Beginning 2021 | ||||||
---|---|---|---|---|---|---|
Issuer | Country | Sector | Rating to | Rating from | Debt amount (mil. $) | |
6/17/2021 | Community Health Systems Inc. | U.S. | Health care | B- | CCC+ | 17,382 |
4/29/2021 | Endeavor Operating Co. LLC | U.S. | Media/entertainment | B | CCC+ | 9,172 |
1/21/2021 | NGL Energy Partners L.P. | U.S. | Utility | B | CCC+ | 8,200 |
4/9/2021 | First Quantum Minerals Ltd. | Canada | Metals, mining, and steel | B | CCC+ | 5,900 |
4/15/2021 | MEG Energy Corp. | Canada | Oil/gas exploration and production | B+ | CCC+ | 3,550 |
1/21/2021 | Petco Holdings Inc. | U.S. | Retail/restaurants | B- | CCC+ | 3,200 |
3/24/2021 | SM Energy Co. | U.S. | Oil/gas exploration and production | B- | CCC+ | 2,747 |
2/10/2021 | Cengage Learning Holdings II Inc. | U.S. | Media/entertainment | B- | CCC+ | 2,555 |
3/3/2021 | Kenan Advantage Group Inc. | U.S. | Transportation | B- | CCC+ | 2,398 |
3/16/2021 | FXI Holdings Inc. | U.S. | Chemicals, packaging, and environmental services | B- | CCC+ | 2,075 |
1/7/2021 | Urban One Inc. | U.S. | Media/entertainment | B- | CCC | 1,872 |
6/3/2021 | Heartland Dental LLC (Hadrian Merger Sub Inc.) | U.S. | Health care | B- | CCC+ | 1,810 |
3/31/2021 | Priority Holdings LLC (Priority Technology Holdings Inc.) | U.S. | High technology | B- | CCC+ | 1,777 |
3/29/2021 | Vine Oil & Gas L.P. (Vine Energy Inc.) | U.S. | Oil/gas exploration and production | B- | CCC+ | 1,760 |
2/18/2021 | Mohegan Tribal Gaming Authority | U.S. | Media/entertainment | B- | CCC+ | 1,696 |
3/31/2021 | CPM Holdings Inc. | U.S. | Capital goods | B- | CCC+ | 1,480 |
3/15/2021 | NESCO Holdings Inc. | U.S. | Capital goods | B | CCC+ | 1,395 |
5/6/2021 | PMHC II Inc. | U.S. | Chemicals, packaging, and environmental services | B- | CCC+ | 1,330 |
5/28/2021 | ASP Unifrax Holdings Inc. | U.S. | Capital goods | B- | CCC+ | 1,329 |
5/6/2021 | Welbilt Inc. | U.S. | Capital goods | B- | CCC+ | 1,325 |
Data as of June 30, 2021. Source: S&P Global Ratings. |
Table 3
CLO BSL Index Metrics | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(CLO Insights 2021 U.S. BSL Index) | ||||||||||||
BSL | B-' Bucket | CCC' bucket | Nonperforming bucket | CreditWatch Neg | Outlook Neg | |||||||
Jan-21 | 25.29% | 7.64% | 0.76% | 1.62% | 32.43% | |||||||
Feb-21 | 25.21% | 7.79% | 0.53% | 0.85% | 32.11% | |||||||
Mar-21 | 25.01% | 7.82% | 0.33% | 1.19% | 29.72% | |||||||
Apr-21 | 25.31% | 6.97% | 0.36% | 1.15% | 26.49% | |||||||
May-21 | 25.06% | 6.51% | 0.34% | 0.76% | 25.37% | |||||||
Jun-21 | 25.39% | 6.56% | 0.25% | 0.50% | 23.00% | |||||||
Jul-21 | 25.45% | 6.18% | 0.39% | 0.73% | 20.63% | |||||||
Data as of July 1, 2021. |
Related Research
- Default Rates Fall And The June Tally Hits A Four-Year Low, July 2, 2021
- About 90% Of 2021 Corporate Defaults Are From 'CCC+' Or Lower-Rated Entities, June 26, 2021
- The U.S. Distress Ratio Fell To 2.6% In May, June 14, 2021
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 4% By March 2022, May 26, 2021
- U.S. CLO And Leveraged Finance Quarterly Key Themes, May 20, 2021
- Credit Markets Update North America Q2 2021, 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 |
Leveraged Finance: | Robert E Schulz, CFA, New York + 1 (212) 438 7808; robert.schulz@spglobal.com |
Ramki Muthukrishnan, New York + 1 (212) 438 1384; ramki.muthukrishnan@spglobal.com | |
Secondary Contact: | Daniel Hu, FRM, New York + 1 (212) 438 2206; daniel.hu@spglobal.com |
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