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Credit Trends: Highest Month-Over-Month Change Since March 2020 As U.S. Distress Ratio Rises To 4.3%

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 to 4.3% as of June 3, 2022, up from 2.4% in the previous month. Although low compared with historical averages, the month-over-month change in distress ratio is the highest since March 2020 (see chart 1).

U.S. speculative-grade spreads have been rising since the beginning of the year due to a mix of growth concerns coupled with hawkish monetary policy to combat inflation. Both 'B' and 'CCC' spreads have increased, by 96 pbs and 246 bps, respectively, since the beginning of the year with the 'CCC' composite spread nearing distressed territory of over 1,000 bps (see chart 3).

Chart 1

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Chart 2

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Chart 3

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Retail Leads The increase In The Distressed Ratio

Over the past month, the number of distressed credits almost doubled to 88, while the amount of distressed debt showed nearly a two-fold increase, rising to $49.2 billion from $25.8 billion. Retail and restaurants led the increase in the number of distressed credits by sector with 12, followed by health care with five. These two sectors, along with aerospace and defense, recorded the highest distress ratios for the month of May at 15.9%, 11.4%, and 11.1%, respectively.

However, credit ratings for retail, health care, media and entertainment, and aerospace and defense sectors are largely stable currently because as all three sectors have speculative-grade negative bias lower than their long-term averages (see table 2).

Table 1

Retail And Restaurants, Automotive, And Capital Goods Reported The Highest Distressed Ratio
SUBSECTOR Distressed ratio* (%) Debt-based distressed ratio (%) No. of distresssed issues Total debt affected (mil. $) Change in distressed credits by sector (%)
Retail/restaurants 15.9 14.4 18 7,742.9 200.0
Health care 11.4 11.4 10 8,752.0 100.0
Aerospace and defense 11.1 9.8 4 2,644.0 33.3
Capital goods 6.7 8.8 4 2,801.0 100.0
Media and entertainment 5.7 6.0 17 12,301.2 41.7
High technology 5.6 3.5 5 2,125.0 400.0
Transportation 5.6 4.1 2 1,000.0
Insurance 5.4 2.6 2 550.0 0.0
Automotive 5.3 5.9 4 2,550.0 33.3
Forest products and building materials 3.1 2.4 2 815.0
Homebuilders/real estate cos. 2.7 2.0 2 600.0 0.0
Telecommunications 2.7 1.2 3 1,500.0 0.0
Utility 2.2 1.3 4 1,453.6 -33.3
Consumer products 2.1 1.4 3 1,265.0 200.0
Chemicals, packaging, and environmental services 1.9 1.9 2 1,061.8 100.0
Financial institutions 1.5 1.9 4 1,559.0 100.0
Oil and gas 1.1 0.7 2 511.2 0.0
Total 4.3 4.2 88 49,231.70 72.5
*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. 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. Data as of June 03, 2022. Source: S&P Global Ratings Research.

Table 2

Credit Stats For The Top Three Distressed Sectors
(%) Current negative bias* Long-term avg. of negative bias* Proportion of 'B-' and below new issues (trailing three years)** Proportion of 'B-' and below outstanding issuer ratings***
Retail/restaurants 10.26 30.92 12.90 25.88
Health care 13.86 20.04 34.25 45.99
Aerospace and defense 18.18 20.67 36.36 36.11
*Negative bias is calculated as the number of U.S. issuers with either a negative outlook or on CreditWatch negative, divided by the total number of U.S. issuers with either positive, negative, or stable (outlook or CreditWatch) implications. The long-term average is taken from 1995 to the present. **The proportion of B- and lower issues is measured relative to the total number of speculative-grade issues. The statistic is calculated for instruments issued in the U.S. during the trailing three years. ***The proportion of B- and lower U.S. issuers is measured relative to the total number of U.S. speculative-grade issuers. Data through June 3, 2022. Source: S&P Global Ratings Research.

Movements In Default Rate Typically Mirror Movements In The Distress Ratio

Movements in the U.S. distress ratio broadly mirror movements in the regions default rate (with a lead time of several months). Assuming we continue to see a sustained rise in the distress ratio, we could expect defaults to rise. We currently expect the U.S 12-month trailing speculative-grade default rate to increase to 3% by March 2023 (see "The U.S. Speculative-Grade Corporate Default Rate Could Reach 3% By 2023 As Risks Continue To Increase," May 19, 2022).

Chart 4

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Table 3

List of Distressed Credits By Issuers
Sector Company Issuer ratings for a related entity Issue count Outstanding amount (mil. $) Rating Outlook/CreditWatch
Aerospace and defense
PM General Purchaser LLC 1 600 B- Stable
Wesco Aircraft Holdings Inc. 3 2,044 CCC+ Negative
Automotive
Carvana Co. 1 600 CCC+ Positive
Cooper-Standard Automotive Inc. Yes 1 400 CCC+ Negative
Ford Motor Co. 2 1,550 BB+ Positive
Capital goods
Aptim Corp. 1 515 CCC+ Stable
Artera Services LLC 1 986 B- Negative
Brand Industrial Services Inc. 1 1,000 B- Negative
OT Merger Corp. 1 300 B- Stable
Chemicals, packaging, and environmental services
Foxtrot Escrow Issuer LLC Yes 1 762 B- Stable
Schenectady International Group Inc. Yes 1 300 B- Positive
Consumer products
H-Food Holdings LLC 1 350 B- Stable
P&L Development LLC Yes 1 465 B- Stable
Revlon Consumer Products Corp. 1 450 CCC- Negative
Financial institutions
CNG Holdings Inc. 1 259 CCC+ Stable
Curo Group Holdings Corp. 1 700 B- Stable
Navient Corp. 1 300 BB- Stable
World Acceptance Corp. 1 300 B Stable
Forest products and building materials
Victors Intermediate Holding II Corp. Yes 1 550 B- Stable
Werner FinCo L.P. 1 265 B- Stable
Health care
Air Methods Corp. 1 500 B- Stable
Bausch Health Americas Inc. Yes 2 2,250 B+ Negative
CHS/Community Health Systems Inc. Yes 1 767 B- Stable
Endo Finco Inc. Yes 1 941 CCC Negative
Lannett Co. Inc. 1 350 CCC+ Negative
Par Pharmaceutical Inc. Yes 1 2,015 CCC Negative
Radiology Partners Inc. Yes 1 710 B- Stable
Tennessee Merger Sub Inc. Yes 1 714 B- Stable
U.S. Renal Care Inc. 1 505 B- Stable
High tech
Avaya Holdings Corp. 2 650 B- Negative
Diebold Nixdorf Inc. 2 1,100 CCC+ Negative
Pitney Bowes Inc. 1 375 BB Stable
Homebuilders/real estate cos.
Diversified Healthcare Trust 2 600 BB- Negative
Insurance
Assurant Inc. 1 250 BBB Stable
Unum Group 1 300 BBB Stable
Media and entertainment
Allen Media LLC 1 640 B Stable
AMC Entertainment Holdings Inc. 3 1,646 CCC+ Positive
AMC Entertainment Inc. Yes 1 98 CCC+ Positive
Audacy Capital Corp. 2 1,010 B Stable
Beasley Mezzanine Holdings LLC 1 300 B- Stable
Cengage Learning Inc. Yes 1 620 B- Stable
Diamond Sports Group LLC 2 4,784 CCC+ Negative
Exela Intermediate LLC Yes 2 1,004 CCC- Negative
National CineMedia LLC 1 230 B- Stable
Skillz Inc. 1 300 CCC+ Stable
Staples Inc. 1 1,000 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
At Home Group Inc. 1 500 B Negative
Bed Bath & Beyond Inc. 1 295 B+ Negative
Fossil Group Inc. 1 125 B Stable
GPS Hospitality Holding Co. LLC 1 400 B- Stable
Liberty Interactive LLC Yes 3 793 BB- Negative
LSF9 Atlantis Holdings, LLC 1 820 B Stable
Michaels Cos. Inc. (The) 1 1,300 B Stable
Party City Holdings Inc. 3 830 B- Negative
QVC Inc. 2 660 BB- Negative
Rite Aid Corp. 3 1,669 CCC+ Negative
Telecommunications
United States Cellular Corp. 3 1,500 BB Stable
Transportation
Azul Investments LLP Yes 2 1,000 CCC+ Stable
Utilities
NGL Energy Finance Corp. Yes 3 1,194 B Negative
Summit Midstream Finance Corp. Yes 1 259 B Stable
Data as of June 3, 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 Analysts: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 Assistant:Tanya Dias, Mumbai

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