(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated in the 'CCC' category. Because the majority of defaults are from these companies, those with negative outlooks or ratings on CreditWatch negative are even more important to monitor in this uncertain economic recovery.)
Key Takeaways
- The tally of European 'CCC' and below rated issuers rose to 59 as of March 31, 2022, from 53 as of Dec. 31, 2021, due to an increase in issuers directly or indirectly related to the Russia-Ukraine conflict.
- Rating recovery in Europe seems slower than in North America with European 'CCC' ratings still above the five-year average in contrast to North America which has dipped back below that level.
- The ripple effects of the conflict combined with expected monetary tightening and lower levels of liquidity are likely to present ongoing challenges for European 'CCC' rated issuers.
- Two-thirds of 'CCC' issuers have less-than-adequate or weak liquidity, while leverage levels above 10x suggest capital structures may become unsustainable depending upon future economic and market conditions.
- The media and entertainment sector continues to hold the highest number of 'CCC' rated issuers, but the number is declining and the sector also currently includes the highest number of potential upgrades.
The number of 'CCC+' and below rated entities rose in the first quarter, but there are pockets of recovery. The tally of 'CCC' and below rated issuers increased to 59 as of March 31, 2022, from 53 as of Dec. 31, 2021, due to several major rating actions and, ultimately, the withdraw of Russia-Ukraine conflict-related entities. Despite the increase, there have also been a few issuers that S&P Global Ratings has upgraded out of the 'CCC' rating category--due to improving operating performance after we downgraded them due to pandemic-related reasons in 2020.
Ratings appear slower to recover in the Europe compared with the U.S. and Canada. The percentage of 'CCC' rated issuers in Europe, at 11%, is higher than its five-year average of just 8%, while in the U.S. and Canada, the percentage of 'CCC' rated issuers has fallen to just 8% and is now lower than its five-year average of 9%. Consequences of the impact of the conflict including higher energy and food prices and the prospect of tighter monetary policy and liquidity conditions may pressure future 'CCC' rated issuer performance.
Two-thirds of the issuers have less-than-adequate or weak liquidity, indicating that the sources of funding available to them in the next 12 months closely match their expected uses of funds. As such, these issuers are highly dependent on operating performance or additional liquidity from external sources, such as access to capital markets, asset disposals, or equity injections by their owners. Average weighted debt to EBITDA leverage for the 'CCC' rating category is 10.5x, with 1.8x interest cover indicating unsustainable capital structures over the next two years for this sector, barring unforeseen favorable developments on the operating side.
About 86% of the sector has a weak or vulnerable business profile, with fairly small scale and limited product/service diversification.
There were no defaults in Europe in first-quarter 2022, bringing down the European speculative-grade default rate to just 0.7% in March 2022. However, the pace of defaults has increased in April with four defaults in the region over the past two weeks (see "Corporate Defaults Inch Up In Europe," published March 31, 2022). We expect cost input pressures to increasingly weigh on corporate margins through the year, and we anticipate default rates to grow to 2.5% as of Dec. 31, 2022.
Chart 1
Chart 2
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Chart 4
Table 1
|
Current Gross Leverage Comparison By Type Of Owner (Median) |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| BRP | Number | Debt to EBITDA | Interest cover | % of total # | ||||||||
| Fair | CCC+ | 6 | 12.6x | 2.2x | 9% | |||||||
| CCC | 2 | 14.6x | 1.3x | 3% | ||||||||
| CCC- | 1 | N.M. | N.M. | 2% | ||||||||
| Weak | CCC+ | 38 | 10.2x | 1.7x | 58% | |||||||
| CCC | 8 | 11.5x | 0.5x | 12% | ||||||||
| CCC- | 2 | 11.2x | 1.7x | 3% | ||||||||
| Vulnerable | CCC+ | 5 | 9.0x | 2.8x | 8% | |||||||
| CCC | 2 | 12.2x | 2.1x | 3% | ||||||||
| CCC- | 1 | 8.9x | 1.4x | 2% | ||||||||
| N.M.--Not meaningful. | ||||||||||||
A reduction in risk appetite pushed European speculative-grade corporate composite spreads in the first quarter back to 2020 levels. The cost of debt has risen while issuance volumes have plummeted in the first quarter as speculative-grade bond issuance in the region dropped by nearly 90% from previous-year levels. Near-term speculative-grade refinance risk is limited, though tighter conditions may begin to weigh on corporates with weaker balance sheets and near-term refinancing requirements.
Chart 5
Media, entertainment, lodging, and leisure is the most exposed sector. But the number of 'CCC' rated issuers in the sector decreased from the previous quarter: we upgraded two issuers (Playa Hotels & Resorts N.V. and International Park Holdings B.V. (PortAventura) out of the rating category due to improved operating performance due to an uptick in consumer demand. The segment also holds the highest upgrade potential by sector because three issuers currently have a positive outlook as the sector's 'CCC' exposure should continue to improve.
Chart 6
Related Research
- Default, Transition, and Recovery: Ruby Pipeline Becomes First Midstream Default Of 2022, April 11, 2022
- Global Credit Conditions Q2 2022: Confluence Of Risks Halts Positive Credit Momentum, March 31, 2022
- Credit Conditions Europe Q2 2022: Seismic Shocks, Security & Supply, March 29, 2022
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 | |
| European Leveraged Finance: | Marta Stojanova, London + 44 20 7176 0476; marta.stojanova@spglobal.com |
| Research Contributor: | Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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