Key Takeaways
- The U.S. distress ratio fell to 2.3%--tied with its lowest level since 2007--from 2.6%.
- The amount of distressed debt has decreased by over 70% since October 2020, with the oil and gas sector the largest contributor to this decline.
- Secondary market spreads across lower rating categories ('B' and 'CCC') narrowed marginally in October (as of Oct. 21) to 373 basis points (bps) and 589 bps from 385 bps and 598 bps in the previous month.
- Despite the downward trends, the amount of debt rated 'B-' and below remains very high, as inflation and supply chain disruptions pose a challenge to operating performance in certain sectors.
Distress Ratios And Distress Volumes Continue To Fall
The U.S. distress ratio--the proportion of speculative-grade (rated 'BB+' or lower) issues with option-adjusted composite spreads of more than 1,000 bps relative to U.S. Treasuries--dipped to 2.3% as of Oct. 19, 2021, from 2.6% in the previous month. The insurance, aerospace and defense, and utilities (largely midstream energy companies) sectors have the highest distress ratios (see table 1). The overall number of distressed issues is very low. As the distress ratio has continued declining, the amount of distressed debt in the U.S. has shrunk by nearly 70% over the last 12 months. Reductions in the oil and gas sector ($20 billion) and media and entertainment sector ($10 billion) have contributed to the decline (see chart 1). Both sectors were heavily impacted by the pandemic and the sudden drop in oil prices in 2020, but they have benefited from accommodative debt capital markets and the steady recovery of the U.S. economy.
Chart 1
Chart 2
Table 1
Media And Entertainment (Largely Lodging and Leisure) Leads By Total Distressed Debt Affected | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Distressed ratio* (%) | Debt-based distressed ratio (%) | Number of distressed issues | Total debt affected (mil. $) | Percent change of distressed credits by sector | ||||||||
Aerospace & defense | 8.60 | 8.10 | 3 | 2,060 | 0.0 | |||||||
Automotive | 4.30 | 4.50 | 3 | 1,950 | 0.0 | |||||||
Banks and brokers | ||||||||||||
Capital goods | 1.50 | 1.50 | 1 | 515 | 0.0 | |||||||
Chemicals, packaging & environmental services | 1.80 | 2.30 | 2 | 1,380 | 0.0 | |||||||
Consumer products | 0.60 | 0.40 | 1 | 450 | 0.0 | |||||||
Financial institutions | 1.00 | 0.90 | 3 | 684 | 0.0 | |||||||
Forest products & building materials | ||||||||||||
Health care | 2.90 | 2.50 | 3 | 2,241 | 200.0 | |||||||
High technology | 2.20 | 0.70 | 2 | 384 | 0.0 | |||||||
Homebuilders/real estate co. | 3.80 | 2.20 | 3 | 690 | 0.0 | |||||||
Insurance | 5.60 | 2.90 | 2 | 550 | 0.0 | |||||||
Media & entertainment | 2.80 | 4.00 | 9 | 8,569 | (18.2) | |||||||
Metals, mining & steel | ||||||||||||
Oil & gas | 2.10 | 1.40 | 4 | 1,299 | (42.9) | |||||||
Retail/restaurants | 2.40 | 1.20 | 3 | 683 | (25.0) | |||||||
Telecommunications | 2.60 | 1.20 | 3 | 1,500 | 0.0 | |||||||
Transportation | ||||||||||||
Utilities (midstream energy) | 4.00 | 2.30 | 9 | 3,093 | (25.0) | |||||||
Total | 2.31 | 2.07 | 51 | 26,048 | (0.32) | |||||||
Data as of Oct. 19, 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. **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. Distribution of distressed credits is defined as the distribution, by sector, within all speculative-grade issues with option-adjusted spreads above 1,000 basis points. Source: S&P Global Ratings Research. |
Headwinds Remain Despite Positive Trends
Despite the positive trends, risks remain as the amount of U.S. corporate debt rated 'B-' or lower remains very high at nearly $234 billion. This is higher than its five-year average of $225 billion (see chart 3) as inflation and supply chain disruptions are posing a risk to issuers' profit margins. This is especially the case for the sectors most exposed to shipping, where supply shortages have become more severe and where we expect supply-demand imbalances to extend well into 2022 (see "Global Credit Conditions Q4 2021: Supply Chain Strain, Inflation Pain," Sept. 29, 2021). However, funding conditions remain highly supportive with spreads on corporate debt remaining largely stable. U.S. secondary market spreads across 'B' and 'CCC' rating categories narrowed in September to 373 bps and 589 bps from 385 bps and 598 bps at the end of September 2021 (see chart 4).
Chart 3
Chart 4
Table 2
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. |
3 | 2,059.50 | CCC+ | Negative | ||||||||
Automotive | ||||||||||||
Ford Motor Co. |
2 | 1,550.00 | BB+ | Negative | ||||||||
Cooper-Standard Automotive Inc. |
Yes | 1 | 400.00 | B- | Negative | |||||||
Capital goods | ||||||||||||
Aptim Corp. |
1 | 515.00 | CCC+ | Stable | ||||||||
Chemicals, packaging and environmental services | ||||||||||||
Cornerstone Chemical Co. |
1 | 450.00 | CCC+ | Negative | ||||||||
TPC Group Inc. |
1 | 930.00 | CCC | Negative | ||||||||
Consumer products | ||||||||||||
Revlon Consumer Products Corp. |
1 | 450.00 | CCC- | Negative | ||||||||
Financial institutions | ||||||||||||
BrightSphere Investment Group Inc. |
1 | 125.00 | BB+ | Stable | ||||||||
CNG Holdings Inc. |
1 | 259.00 | B- | Stable | ||||||||
Navient Corp. |
1 | 300.00 | BB- | Stable | ||||||||
Health care | ||||||||||||
Air Methods Corp. |
1 | 500.00 | B- | Stable | ||||||||
Envision Healthcare Corp. |
1 | 1,026.45 | CCC+ | Negative | ||||||||
Tennessee Merger Sub Inc. |
Yes | 1 | 714.41 | B- | Negative | |||||||
High technology | ||||||||||||
Pitney Bowes Inc. |
1 | 375.00 | BB | Stable | ||||||||
Riverbed Technology Inc. |
1 | 9.46 | CC | Negative | ||||||||
Homebuilders/real estate companies | ||||||||||||
Diversified Healthcare Trust |
2 | 600.00 | BB- | Negative | ||||||||
K. Hovnanian Enterprises Inc. |
Yes | 1 | 90.00 | CCC+ | Positive | |||||||
Insurance | ||||||||||||
Assurant Inc. |
1 | 250.00 | BBB | Stable | ||||||||
Unum Group |
1 | 300.00 | BBB | Stable | ||||||||
Media and entertainment | ||||||||||||
AMC Entertainment Holdings Inc. |
3 | 1,646.32 | CCC+ | Positive | ||||||||
AMC Entertainment Inc. |
Yes | 1 | 98.32 | CCC+ | Positive | |||||||
Diamond Sports Group LLC |
3 | 4,824.80 | CCC+ | Negative | ||||||||
Exela Intermediate Co. LLC |
Yes | 1 | 1,000.00 | CCC- | Negative | |||||||
Staples Inc. |
1 | 1,000.00 | B | Negative | ||||||||
Oil and gas | ||||||||||||
Global Marine Inc. |
Yes | 1 | 261.22 | CCC | Negative | |||||||
Great Western Petroleum LLC |
1 | 235.00 | B- | Stable | ||||||||
KLX Energy Services Holdings Inc. |
1 | 250.00 | CCC+ | Stable | ||||||||
W&T Offshore Inc. |
1 | 552.46 | CCC+ | Negative | ||||||||
Retail/restaurants | ||||||||||||
Party City Holdings Inc. |
1 | 22.92 | CCC+ | Positive | ||||||||
QVC Inc. |
2 | 660.00 | BB- | Stable | ||||||||
Telecommunications | ||||||||||||
United States Cellular Corp. |
3 | 1,500.00 | BB | Stable | ||||||||
Utilities | ||||||||||||
CSI Compressco LP |
1 | 155.00 | B- | Stable | ||||||||
PBF Finance Corp. |
Yes | 3 | 1,724.99 | BB- | Negative | |||||||
Talen Energy Supply LLC |
5 | 1,213.41 | B- | Stable | ||||||||
Data as of Oct. 19, 2021. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research. |
Related Research
- China-Based Sinic Holdings' Missed Bond Payment Pushes The 2021 Global Corporate Default Tally To 63, Oct. 22, 2021
- The Economic Impact Of Default Is Falling As Selective Defaults Rise, Sept. 16, 2021
- Favorable High-Yield Oil And Gas Market Fuels Financing Activity And Lifts Recently Restructured Entities, Sept. 9, 2021
- Ratings Weekly Digest, Sept. 8, 2021
- No Time For Complacency For The U.S. Speculative-Grade Market, Sept. 2, 2021
- U.S. Media And Entertainment Industry Check-In, Sept. 1, 2021
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 2.5% By June 2022, Aug. 20, 2021
- Utilities Are Spinning Off Their Midstream Assets To Support Credit Quality, Aug. 4, 2021
- Industry Top Trends Midyear 2021: Resilience, Recovery, Risks, July 20, 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 Contributors: | Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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