Key Takeaways
- The amount of distressed debt nearly doubled over the past month, rising to $49.2 billion from $25.8 billion last month.
- Secondary market spreads have also been increasing. Since the beginning of the year, 'B' and 'CCC' spreads have widened by 26% and 41%, respectively.
- By sector, retail has led the rise in the distress ratio rising to 15.9% from 4.5% over the past month.
- Despite the rise, the overall distress ratio remains low relative to its long-term averages.
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
Chart 2
Chart 3
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
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
- Global Credit Conditions Special Update: Inflation, War, And COVID Drag On, May 17, 2022
- Default, Transition, and Recovery: The Global Corporate Default Tally Rises To 31 With The First Bankruptcy Of 2022, May 16, 2022
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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