Key Takeaways
- The U.S. distress ratio increased slightly to 2.6% as of Dec. 3, 2021, from 2.3% in our November report, but it remains below its 2021 average of 2.9%.
- The distress ratio remains near historical lows despite a record number of U.S. speculative-grade issuers--a sign that market stress in the credit markets is remarkably low.
- Secondary market spreads increased since our November report across all speculative-grade rating categories due to the emergence of the omicron variant and persistent inflation, which may cause the Fed to speed up the pace of tapering.
- Despite this, the volume of distressed debt has contracted by over 90% (as of Nov. 12, 2021) from pandemic-related peaks observed in March 2020.
Chart 1
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
Chart 3
Chart 4
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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