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Credit Trends: The U.S. Distress Ratio Hovers Historically Low Despite Market Volatility

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Default, Transition, and Recovery: Defaults On Track To Close The Year Below 2023 Levels


Credit Trends: The U.S. Distress Ratio Hovers Historically Low Despite Market Volatility

Key Takeaways:

  • The U.S. distress ratio remained unchanged since our last report at 2.4%, despite increasing recent market volatility and rising secondary market spreads.
  • Only 51 credits are currently trading at distressed levels and the distress ratio remains well below its five-year average of 8.3%.
  • As the U.S. distress ratio is a leading indicator of defaults, defaults in the region are at their lowest year-to-date levels since 2011.

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--remained at 2.4% as of April 19, 2022. The distress ratio, an indicator of the risk level the market has priced into the bonds, remains well below its five-year average of 8.3%, even as volatility in financial markets has increased and borrowing costs have begun to rise. U.S. speculative-grade spreads, a good indicator of broad market stress in the speculative-grade segment, are around 20% higher than the beginning of the year (see chart 1). Additionally, U.S. speculative-grade bond issuance continues to decline in 2022 and remains nearly 80% below previous year records through April 30 (see chart 2).

Chart 1

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Chart 2

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Movements in the U.S. distress ratio run roughly parallel to movements in the U.S. default rate (with a several month lead time), both of which have stabilized at historically low levels, so far, in 2022 (see chart 3). With only 12 defaults in 2022, so far, the U.S. default tally is at its lowest year-to-date level since 2011 (see chart 4).

However, risks are increasing, including the impact of rising cost on corporate margins and monetary policy tightening, which could both increase financing costs and reduce the amount of liquidity available to speculative grade borrowers. These challenges could lead to a corresponding increase in the distressed ratio and thus, an uptick in default rates.

Chart 3

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Chart 4

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Additional Exhibits

Table 1

Distribution of S&P Global Distress Ratio By Industry
SUBSECTOR Distressed Ratio * (%) Debt Based Distressed Ratio (%) Number of Distresssed Issues Total Debt Affected (Mil. $) Percent Change Of Distressed Credits By Sector
Aerospace and defense 8.3 7.5 3 2044 50.0
Automotive 4.1 4.9 3 1950 (25)
Capital goods 3.2 3.2 2 1065 -33.3
Chemicals, packaging, and environmental services 1.0 0.5 1 300
Consumer products 1.3 0.6 2 575 -66.7
Financial institutions 0.7 0.7 2 559 0.0
Health care 4.8 3.8 5 3322 66.7
High technology 1.1 0.6 1 375 0.0
Homebuilders/real estate Co. 2.6 1.9 2 600 0.0
Insurance 5.4 2.6 2 550 0.0
Media and entertainment 3.9 4.6 12 9731 -7.7
Oil and gas 1.1 0.6 2 511 0.0
Retail/restaurants 4.5 2.3 5 1269 -28.6
Telecommunications 2.7 1.2 3 1500 0.0
Utility 3.2 1.3 6 1473 0.0
Total 2.4 2.1 51 25824 -12
*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. Data as of Apr. 19, 2022. Source: S&P Global Ratings Research. 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. §Outstanding debt amount associated with distressed issues divided by the total debt outstanding of speculative-grade issues.

Table 2

List of Distressed Credits By Issuers
Sector/company Issuer ratings are for a related entity Issue count Outstanding amount ($ in millions) Rating Outlook/ CreditWatch
Aerospace and defense
Wesco Aircraft Holdings Inc. 3 2044 CCC+ Negative
Automotive
Cooper-Standard Automotive Inc. Yes 1 400 CCC+ Negative
Ford Motor Co. 2 1550 BB+ Positive
Capital goods
Ahern Rentals Inc. 1 550 CCC Developing
Aptim Corp. 1 515 CCC+ Stable
Chemicals, packaging, and environmental services
Schenectady International Group Inc. Yes 1 300 B- Positive
Consumer Products
Fossil Group Inc. 1 125 B Stable
Revlon Consumer Products Corp. 1 450 CCC- Negative
Financial institutions
CNG Holdings Inc. 1 259 CCC+ Stable
Navient Corp. 1 300 BB- Stable
Health care
Air Methods Corp. 1 500 B- Stable
Endo Finco Inc. Yes 1 941 CCC+ Negative
Envision Healthcare Corp. 1 1026 CCC Negative
Lannett Co. Inc. 1 350 CCC+ Negative
U.S. Renal Care Inc. 1 505 B- Stable
High technology
Pitney Bowes Inc. 1 375 BB Stable
Homebuilders/Real Estate Co.
Diversified Healthcare Trust 2 600 BB- Negative
Insurance
Assurant Inc. 1 250 BBB Stable
Unum Group 1 300 BBB Stable
Media and entertainment
AMC Entertainment Holdings Inc. 3 1646 CCC+ Positive
AMC Entertainment Inc. Yes 1 98 CCC+ Positive
Diamond Sports Group LLC 2 4784 CCC+ Negative
Exela Intermediate LLC Yes 2 1004 CCC- Negative
National CineMedia LLC 1 230 B- Stable
Skillz Inc. 1 300 CCC+ Stable
Staples Inc. 1 1000 B Negative
WeWork Cos. LLC 1 669 CCC+ Negative
Oil and gas
Global Marine Inc. Yes 1 261 CCC Negative
KLX Energy Services Holdings Inc. 1 250 CCC+ Stable
Retail/Restaurants
99 cents only stores LLC 1 350 CCC+ Negative
Party City Holdings Inc. 1 23 B Stable
QVC Inc. 2 660 BB- Stable
Rite Aid Corp. 1 236 B- Stable
Telecommunications
United States Cellular Corp. 3 1500 BB Stable
Utility
Summit Midstream Finance Corp. Yes 1 259 B Stable
Talen Energy Supply LLC 5 1213 CCC Negative
Data as of April 19, 2022. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Nicole Serino, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Senior Director:Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Research Assistant:Tanya Dias, Mumbai

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