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Credit Trends: The U.S. Distress Ratio Remains Low Despite A Record Number Of Speculative-Grade Issuers

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Credit Trends: The U.S. Distress Ratio Remains Low Despite A Record Number Of Speculative-Grade Issuers

Chart 1

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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 basis points (bps) relative to U.S. Treasuries--increased slightly to 2.6% as of Dec. 6, 2021, up from 2.3% in the previous month. Low recent levels, including the 2021 average of 2.9%, are influenced by our calculation method, which accounts for all speculative-grade issuers. However, it is still very low given the sheer number of speculative-grade issuers (about 2,000), which could trade at distressed levels. This indicates that market participants are considering stress in the credit markets to be remarkably low. The current level also remains well below its five-year average of 9.7%.

Financing Conditions Are Supportive But Risks Remain

Financing conditions remain accommodating for U.S. speculative-grade issuers as 2021 issuance has already surpassed 2020 record year-end levels and climbed to a new high (see chart 2). Secondary credit spreads have widened but remain well below pre-pandemic levels. The 'B' composite spread increased to 425 bps as of Dec. 3, 2021, from 385 bps as of Oct. 29, 2021, while the 'CCC' composite spread increased to 653 bps from 601 bps in the same period (see chart 3). Default rates are also low with the U.S. speculative-grade default rate falling to 2% as of Oct. 31 (see chart 4). We expect default rates to remain low with a 12-month speculative-grade corporate default rate of 2.5% by September 2022 (see "The U.S. Speculative-Grade Corporate Default Rate Could Reach 2.5% By September 2022," Nov. 16, 2021). Nonetheless, risks remain, not least the emergence of the omicron variant and persistent inflation. If persistent inflation were to result in a policy misstep by the Federal Reserve, we could see a rapid repricing of financial and real assets, higher debt-servicing costs, and tighter financing conditions, all which would likely lead to a sharp rise in the distress ratio.

Chart 2

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Chart 3

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Chart 4

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Additional Exhibits

Table 1

Aerospace And Defense, Insurance And Utilities Have The Highest Distress Ratio
Distressed ratio* (%) Debt-based distress ratio (%) No. of distressed issues Total debt affected (mil. $)
Aerospace and defense 5.4 4.3 2 1,168.5
Automotive 2.7 3.2 2 1,550.0
Capital goods 3.0 1.5 2 1,065.0
Chemicals, packaging, and environmental services 1.8 2.3 2 1,380.0
Consumer products 1.1 0.5 2 575.0
Financial institutions 1.1 0.8 3 684.0
Forest products and building materials 1.6 1 325.0
Health care 2.8 2.1 3 1,876.4
High technology 1.1 0.7 1 375.0
Homebuilders/real estate co. 3.8 2.2 3 690.0
Insurance 5.3 2.7 2 550.0
Media and entertainment 2.8 2.9 9 7,799.4
Oil and gas 3.0 1.1 6 2,449.9
Retail/restaurants 3.3 1.2 4 1,032.9
Telecommunications 3.5 1.2 4 1,846.1
Utilities (midstream energy) 5.8 2.4 12 5,061.8
Total 2.6 1.7 58 28,429.0
Data as of Nov. 12, 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.

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.

2 1,168.5 CCC+ Negative
Automotive

Ford Motor Co.

2 1,550.0 BB+ Positive
Capital goods

Ahern Rentals Inc.

1 550.0 CCC Developing

Aptim Corp.

1 515.0 CCC+ Stable
Chemicals, packaging and environmental services

Cornerstone Chemical Co.

1 450.0 CCC+ Negative

TPC Group Inc.

1 930.0 CCC Negative
Consumer products

Fossil Group Inc.

1 125.0 B Stable

Revlon Consumer Products Corp.

1 450.0 CCC- Negative
Financial institutions

BrightSphere Investment Group Inc.

1 125.0 BB+ Stable

CNG Holdings Inc.

1 259.0 B- Stable

Navient Corp.

1 300.0 BB- Stable
Forest Products & Building Materials

Apex Tool Group LLC

1 325.0 CCC Negative
Health care

Air Methods Corp.

1 500.0 B- Stable

Envision Healthcare Corp.

1 1,026.4 CCC+ Negative

Lannett Co. Inc.

1 350.0 B- Negative
High technology

Pitney Bowes Inc.

1 375.0 BB Stable
Homebuilders/real estate companies

Diversified Healthcare Trust

2 600.0 BB- Negative

K. Hovnanian Enterprises Inc.

Yes 1 90.0 CCC+ Positive
Insurance

Assurant Inc.

1 250.0 BBB Stable

Unum Group

1 300.0 BBB Stable
Media and entertainment

AMC Entertainment Holdings Inc.

3 1,646.3 CCC+ Positive

AMC Entertainment Inc.

Yes 1 98.3 CCC+ Positive

Diamond Sports Group LLC

3 4,824.8 CCC Negative

National CineMedia LLC

1 230.0 CCC+ Positive

Staples Inc.

1 1,000.0 B Negative
Oil and gas

Global Marine Inc.

Yes 1 261.2 CCC Negative

Gran Tierra Energy International Holdings Ltd

Yes 1 300.0 B Stable

KLX Energy Services Holdings Inc.

1 250.0 CCC+ Stable

Moss Creek Resources Holdings Inc.

1 500.0 B- Stable

Nabors Industries Inc.

1 586.3 CCC+ Positive

W&T Offshore Inc.

1 552.5 CCC+ Stable
Retail/restaurants

99 cents only stores LLC

1 350.0 CCC+ Negative

Party City Holdings Inc.

1 22.9 B Stable

QVC Inc.

2 660.0 BB- Stable
Telecommunications

Trilogy International South Pacific

1 346.1 B- Stable

United States Cellular Corp.

3 1,500.0 BB Stable
Utilities

CSI Compressco L.P.

1 155.0 B- Stable

NGL Energy Finance Corp.

Yes 2 718.4 B Negative

PBF Finance Corp.

Yes 4 2,975.0 B Negative

Talen Energy Supply LLC

5 1,213.4 B- Stable
Data as of Dec. 3, 2021. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.

Related Research

This report does not constitute a rating action.

Credit Markets Research:Nicole Serino, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Research Contributor:Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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