(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 typically from issuers rated in the 'CCC' category, these and 'B-' rated companies with negative outlooks or ratings on CreditWatch negative require close monitoring.)
Key Takeaways
- The number of 'CCC' category ratings on U.S. and Canadian companies declined to a 21-month low of 144 as of Nov. 29, 2021.
- Downgrades to the 'CCC' category tied upgrades out of the rating category in November for the first time in 2021, with one each.
- The negative biases for 'CCC' and 'B-' rated issuers have declined to all-time lows.
- Positive overall rating trends risk being undermined by the emergence of the omicron variant and persistent inflation, which may cause the Federal Reserve to speed up the pace of tapering and interest rate tightening.
On This Month's Front Burner
'CCC' issuance is 1.63x 2020 year-to-date levels. Despite slowing over the last two months, bond issuance levels remained strong in November for the lower rating categories compared to the same period last year as U.S. speculative-grade bond and loan issuance topped $1 trillion for the first time. However, issuance is now slowing as investors become more cautious with the emergence of the omicron variant of COVID-19 and the likelihood that the Fed may move faster in terms of tapering and raising rates to counter persistent inflation. Nonetheless, issuance in the 'CCC' rating category remains 60% higher than at the point last year as investors' hunt for yield pushed speculative-grade bond, leveraged loan, and collateralized loan obligation totals to multiyear and in some cases record-breaking first-half totals in 2021 (see "Global Financing Conditions: Bond Issuance Is Expected To Finish The Year Close To 2020 Levels; Drop 2% Next Year," Oct. 25, 2021).
Spreads are beginning to rise from tight levels. U.S. 'CCC' and 'B' composite spreads were largely steady in the third quarter but have risen sharply so far in the fourth quarter. 'CCC' spreads have increased to 647 basis points (bps) in November from 621 bps as of Aug. 31, and the 'B' spread has increased to 420 bps from 404 bps in the same time period, in tandem with slowing issuance. The recent rise in spreads is likely due to increasing investor caution due to a more uncertain and volatile outlook, given the emergence of the omicron variant and the possibility that the Fed may move faster in terms of tapering and raising rates.
Upgrades tie downgrades for the first time in 2021. Rating actions into and out of the 'CCC' rating category slowed last month with only one upgrade and one downgrade since our last report. This includes the downgrade of U.S.-based medical device contract manufacturing organization Avalign Holdings Inc., whose operating performance has been significantly affected by ongoing supply chain and labor disruptions. For corporate borrowers in many sectors, supply constraints and/or labor shortages are expected to persist into the second half of 2022, which could hurt profit margins if companies are not able to pass prices through to consumers ( see "Credit Conditions: North America: As Recovery Rolls On, Inflation Risks Remain," Dec 1, 2021). By sector, consumer products has the highest 'CCC' exposure by issuer count, with 24 on negative bias and at risk for further downgrade or default.
Despite risks, credit trends remain positive for now. The negative bias--issuers with a negative outlook or CreditWatch placement with negative implications--of 'CCC' rated issuers has declined to an all-time low of 61%. At the same time the positive bias--issuers with a positive outlook or CreditWatch placement with positive implications—has risen to 13% (its highest level since 2012) as we expect issuers to continue to be upgraded out of the 'CCC' rating category. The negative bias for 'B-' rated issuers has also dropped to its all-time low of 9% in November 2021.
The U.S. default rate continues to drop. There were only nine defaults in the region from July to October. With these defaults, the North American total so far in 2021 is 37, less than a third of last year's year-to-date total of 135. The U.S. speculative grade default rate fell to 3.1% in July 2021 and is expected to fall to 2.5% by September 2022. (see "Two Defaults Brings The Corporate Tally To 67," Nov. 18, 2021 and "The U.S. Speculative-Grade Corporate Default Rate Could Reach 2.5% By September 2022," Nov. 16, 2021).
CLO credit metrics remain stable. Upgrades for issuers with loans held across U.S. broadly syndicated loan collateralized loan obligations (CLOs) outnumbered downgrades for another month. CLO transaction junior overcollateralization test cushions reached a new high for the year, while exposure to defaulted issuers, issuers on CreditWatch with negative implications, and issuers with a negative rating outlook have all reached new lows for the year (see table 3).
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Table 1
Top 20 Rating Changes To 'CCC' From 'B-' By Debt Amount (Beginning 2021) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating date | Issuer | Country | Sector | Rating to | Rating from | Debt amount (mil. US$) | ||||||||
1/27/2021 | Viking Cruises Ltd. (Viking Holdings Ltd) | United States | Media and entertainment | CCC+ | B- | 3,225 | ||||||||
5/25/2021 | GEO Group (The) Inc. | United States | Consumer products | CCC+ | B | 2,734 | ||||||||
9/29/2021 | Fantasia Holdings Group Co. Ltd. | United States | Homebuilders/real estate co. | CCC | B | 1,950 | ||||||||
4/1/2021 | Epic Crude Services, LP | United States | Utility | CCC+ | B- | 1,175 | ||||||||
5/12/2021 | WaterBridge Operating LLC (WaterBridge Resources, LLC) | United States | Utility | CCC+ | B- | 1,000 | ||||||||
4/9/2021 | Ruby Pipeline LLC | United States | Utility | CCC | B- | 825 | ||||||||
8/31/2021 | Zep Inc. | United States | Chemicals, packaging, and environmental services | CCC+ | B- | 725 | ||||||||
9/2/2021 | U.S. TelePacific Holdings Corp. | United States | Telecommunications | CCC+ | B- | 655 | ||||||||
2/26/2021 | Dawn Acquisitions LLC (Infra Colodata Holdings LLC) | United States | Telecommunications | CCC | B- | 550 | ||||||||
8/19/2021 | JSG I Inc. | United States | Capital goods | CCC+ | B- | 460 | ||||||||
11/19/2021 | Avalign Holdings, Inc. | United States | Health care | CCC+ | B- | 458 | ||||||||
4/16/2021 | Cornerstone Chemical Co. | United States | Chemicals, packaging, and environmental services | CCC+ | B- | 450 | ||||||||
1/25/2021 | PetroChoice Holdings, Inc. | United States | Consumer products | CCC+ | B- | 435 | ||||||||
6/17/2021 | Salient CRGT, Inc. | United States | Aerospace and defense | CCC | B- | 420 | ||||||||
4/8/2021 | BEP Ulterra Holdings, Inc. | United States | Oil and gas exploration and production | CCC+ | B- | 415 | ||||||||
9/8/2021 | Dunn Paper Holdings Inc. | United States | Chemicals, packaging, and environmental services | CCC+ | B- | 350 | ||||||||
3/19/2021 | MVK Intermediate Holdings, LLC | United States | Consumer products | CCC+ | B | 335 | ||||||||
5/11/2021 | Overseas Shipholding Group Inc. | United States | Transportation | CCC+ | B- | 325 | ||||||||
Data as of Nov. 29, 2021. Source: S&P Global Ratings. |
Table 2
Top 20 Rating Upgrades From 'CCC' Category (Beginning 2021) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating date | Issuer | Country | Sector | Rating to | Rating from | Debt amount (mil. US$) | ||||||||
10/22/2021 | Finastra Ltd. | United States | High technology | B- | CCC+ | 36,510 | ||||||||
6/17/2021 | Community Health Systems Inc. | United States | Health care | B- | CCC+ | 17,382 | ||||||||
4/29/2021 | Endeavor Operating Company, LLC | United States | Media and entertainment | B | CCC+ | 9,172 | ||||||||
1/21/2021 | NGL Energy Partners LP | United States | Utility | B | CCC+ | 8,200 | ||||||||
4/9/2021 | First Quantum Minerals Ltd | Canada | Metals, mining, and steel | B | CCC+ | 5,900 | ||||||||
7/15/2021 | Rite Aid Corp. | United States | Retail/restaurants | B- | CCC+ | 4,069 | ||||||||
4/15/2021 | MEG Energy Corp. | Canada | Oil and gas exploration and production | B+ | CCC+ | 3,550 | ||||||||
8/26/2021 | CB Poly Investments, LLC | United States | Consumer products | B- | CCC+ | 3,520 | ||||||||
1/21/2021 | Petco Holdings Inc. | United States | Retail/restaurants | B- | CCC+ | 3,200 | ||||||||
3/24/2021 | SM Energy Company | United States | Oil and gas exploration and production | B- | CCC+ | 2,747 | ||||||||
2/10/2021 | Cengage Learning Holdings II Inc. | United States | Media and entertainment | B- | CCC+ | 2,555 | ||||||||
7/14/2021 | Callon Petroleum Co. | United States | Oil and gas exploration and production | B- | CCC+ | 2,550 | ||||||||
3/3/2021 | Kenan Advantage Group Inc. | United States | Transportation | B- | CCC+ | 2,398 | ||||||||
3/16/2021 | FXI Holdings, Inc. | United States | Chemicals, packaging, and environmental services | B- | CCC+ | 2,075 | ||||||||
9/28/2021 | Gulf Finance, LLC | United States | Oil and gas exploration and production | B- | CCC+ | 1,873 | ||||||||
1/7/2021 | Urban One, Inc. | United States | Media and entertainment | B- | CCC | 1,872 | ||||||||
6/3/2021 | Heartland Dental, LLC (Hadrian Merger Sub Inc.) | United States | Health care | B- | CCC+ | 1,810 | ||||||||
3/31/2021 | Priority Holdings, LLC (Priority Technology Holdings, Inc.) | United States | High technology | B- | CCC+ | 1,777 | ||||||||
3/29/2021 | Vine Oil & Gas LP (Vine Energy Inc.) | United States | Oil and gas exploration and production | B- | CCC+ | 1,760 | ||||||||
2/18/2021 | Mohegan Tribal Gaming Authority | United States | Media and entertainment | B- | CCC+ | 1,696 | ||||||||
Data as of Nov. 29, 2021. Source: S&P Global Ratings. |
Table 3
BSL CLO Index Metrics (CLO Insights 2021 U.S. BSL Index) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(%) | 'B-' bucket | 'CCC' bucket | Nonperform 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 | |||||||
Aug-21 | 25.43 | 5.94 | 0.43 | 0.55 | 18.02 | |||||||
Sep-21 | 25.15 | 6.32 | 0.37 | 0.77 | 16.41 | |||||||
Oct-21 | 25.65 | 6.07 | 0.35 | 0.77 | 15.39 | |||||||
Nov-21 | 26.01 | 6.21 | 0.32 | 0.43 | 14.27 | |||||||
BSL CLO--Broadly syndicated loan collateralized loan obligation. |
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 |
Research Contributor: | Yogesh Kumar, Pune; yogesh.kumar2@spglobal.com |
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