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Default, Transition, and Recovery: The U.S. Distress Ratio Accelerates To Highest Level Since October 2020

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 9.2% as of July 5, 2022, from 4.3% as of June 3. The ratio is now at its highest level since October 2020 and has surpassed its five-year average of 7.3%, as investors price in a higher risk amid a growing concern of rising inflation and a potential slowdown in the U.S. economy.

Roughly, movements in the distress ratio run parallel to movements in the U.S. default rate with several months lead time. Multiple headwinds including tighter financing, lower growth prospects, and geopolitical tensions intensifying supply chain pressures all weigh on lower-rated U.S. issuers and is expected to push the U.S. default rate to 3% by the first quarter of 2023 ( see "Global Credit Conditions Q3 2022: Resurfacing Credit Headwinds", June 30, 2022).

Chart 1

image

Consumer Driven Sectors Pricing Signals Stress

The retail and restaurants sector continues to lead the distress ratio at 17.7% in July, up from 16% in June with 20 distressed issues. In addition, the media and entertainment sector led with the largest increase in the number of distress issues last month, increasing by 21 distress issues since June (see chart 2). Together, the retail and media sectors account for nearly one-third of all distressed debt ($37.2) as investors weight the risk of persistently high inflation and the slowdown of global economic growth on lower rated consumer-driven issuers.

Table 1

Distribution of S&P Global Distress Ratio By Industry
Sector Distressed Ratio * (%) Debt Based Distressed Ratio § (%) Number of Distresssed Issues Distress ratio (%) (previous mnonth) Number of Distresssed Issues (previous month) Monthly (%) Change In Distress Ratio Monthly Change In Number of Distressed Issues
Retail/restaurants 17.7 15.2 20 16 18 1.8 2
Forest products and building materials 17.2 14.7 11 3 2 14.1 9
Capital goods 15.3 13.7 9 7 4 8.6 5
Health care 14.9 15.3 13 11 10 3.5 3
Aerospace and defense 14.3 11.7 5 11 4 3.2 1
Chemicals, packaging and environmental services 14.0 15.1 15 2 2 12.1 13
Homebuilders/real estate Co. 13.3 13.9 10 3 2 10.6 8
Media and entertainment 12.9 14.4 38 6 17 7.2 21
Automotive 11.8 18.5 9 5 4 6.5 5
Telecommunications 11.7 9.2 13 3 3 9.0 10
High technology 10.2 11.5 9 6 5 4.6 4
Transportation 8.6 5.3 3 6 2 3.0 1
Consumer products 5.6 5.0 8 2 3 3.5 5
Insurance 5.4 2.6 2 5 2 0.0 0
Utilities 4.5 2.8 7 2 4 2.3 3
Financial institutions 4.0 6.3 11 2 4 2.5 7
Oil and gas 1.5 1.1 3 1 2 0.4 1
*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 July 5, 2022. Source: S&P Global Ratings Research.

Chart 2

image

Most Distressed Debt Has Come From Newly Added Issuers

With the increase in the distress ratio, the amount of distressed debt also jumped $115.5 billion, up from $49.2 billion in June. Over 80% of the increase in distressed debt came from issuers that previously did not have issues trading at distressed levels and account for $57.3 billion of additional distressed debt since June 3 (see chart 3), a sign of an overall repricing of market risk. Some of these issuers include satellite T.V. provider DISH DBS Corp. with four distressed issues amounting to $6.5 billion in distressed debt, and cruise operator Royal Caribbean Cruises Ltd., with five issues trading at distressed levels, amounting to $4.5 billion in distressed debt.

Chart 3

image

Table 3

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
PM General Purchaser LLC 1 600 B- Stable
Triumph Group Inc. 1 500 CCC+ Negative
Wesco Aircraft Holdings Inc. 3 2044 CCC+ Negative
Automotive
Carvana Co. 5 5725 CCC+ Positive
Cooper-Standard Automotive Inc. Yes 1 400 CCC+ Negative
Ford Motor Co. 2 1550 BB+ Positive
Wheel Pros Inc. 1 365 B- Negative
Capital goods
Aptim Corp. 1 515 CCC+ Stable
Artera Services LLC 1 986 B- Negative
ASP Unifrax Holdings Inc. 1 400 B- Negative
Brand Industrial Services Inc. 1 1000 B- Negative
JPW Industries Holdings Corp. Yes 2 280 B Stable
Maxim Crane Works Holdings Capital LLC 1 303 B- Stable
OT Merger Corp. 1 300 B- Stable
Tutor Perini Corp. 1 500 B+ Stable
Chemicals, packaging and environmental services
Ardagh Holdings USA Inc. Yes 2 1800 B+ Stable
Foxtrot Escrow Issuer LLC Yes 1 762 B- Stable
FXI Holdings Inc. 1 505 B- Stable
Iris Holding Inc. 1 400 B Negative
Kobe US Midco 2 Inc. Yes 1 200 B- Stable
LABL Inc. 2 1150 B- Stable
Lummus Technology Holdings V LLC 1 460 B+ Stable
Mauser Packaging Solutions Holding Co. 1 1350 B- Stable
Olympus Water US Holding Corp. Yes 1 400 B- Stable
PMHC II Inc. 1 756 B- Stable
Schenectady International Group Inc. Yes 1 300 B- Positive
Trident TPI Holdings Inc. 1 345 B- Stable
Venator Materials LLC Yes 1 375 B- Stable
Consumer products
Allied Universal Holdco LLC Yes 1 1050 B Stable
Grubhub Holdings Inc. Yes 1 500 CCC+ Developing
H-Food Holdings LLC 1 350 B- Negative
Kronos Acquisition Holdings Inc. 1 525 B- Negative
P&L Development LLC Yes 1 465 CCC+ Negative
Signal Parent Inc. 1 300 B Stable
SWF Holdings I Corp. 1 625 B- Stable
TKC Holdings Inc. 1 675 B- Stable
Financial institutions
CNG Holdings Inc. 1 259 CCC+ Stable
Curo Group Holdings Corp. 1 700 B- Stable
Enova International Inc. 1 375 B Stable
Freedom Mortgage Corp. 4 2089 B Stable
LD Holdings Group LLC 2 1100 B Negative
Navient Corp. 1 300 BB- Stable
World Acceptance Corp. 1 300 B Stable
Forest products and building materials
BCPE Ulysses Intermediate Inc. Yes 1 400 B- Stable
Cornerstone Building Brands Inc. 1 500 B+ Stable
CP Atlas Buyer Inc. 1 510 B- Stable
LBM Acquisition LLC 1 820 B- Stable
New Enterprise Stone & Lime Co. Inc. 1 267 B Stable
Oscar AcquisitionCo LLC 1 585 B Stable
Park River Holdings Inc. 2 740 B- Stable
Victors Intermediate Holding II Corp. Yes 1 550 B- Stable
Werner FinCo L.P. 1 265 B- Stable
White Cap Parent LLC Yes 1 300 B Stable
Health care
Air Methods Corp. 1 500 B- Stable
Bausch Health Americas Inc. Yes 2 2250 B Negative
CHS/Community Health Systems Inc. Yes 3 2957 B- Stable
Endo Finco Inc. Yes 1 941 CC Negative
Lannett Co. Inc. 1 350 CCC+ Negative
Par Pharmaceutical Inc. Yes 1 2015 CC Negative
Prime Healthcare Services Inc. 1 610 B- Stable
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 technology
Avaya Inc. 1 750 B- Negative
CommScope Inc. 2 1700 B- Stable
Diebold Nixdorf Inc. 2 1100 CCC+ Negative
LogMeIn Inc., 1 750 B Stable
Pitney Bowes Inc. 1 375 BB Stable
Rackspace Technology Global Inc. 1 550 B Stable
Veritas US Inc. Yes 1 1750 B- Stable
Homebuilders/real estate co.
Diversified Healthcare Trust 2 600 BB- Negative
Five Point Operating Co. L.P. Yes 1 600 B- Stable
New Home Co. Inc. (The) 1 250 B- Stable
Service Properties Trust 6 2725 B+ 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 1646 CCC+ Positive
AMC Entertainment Inc. Yes 1 98 CCC+ Positive
Audacy Capital Corp. 2 1010 B- Negative
Beasley Mezzanine Holdings LLC 1 300 B- Negative
Castle US Holding Corp. Yes 1 300 B- Stable
Cengage Learning Inc. Yes 1 620 B- Stable
Centerfield Media Parent Inc. 1 785 B Stable
Clear Channel Outdoor Holdings Inc. 2 2050 CCC+ Stable
ClubCorp Holdings Inc. 1 425 CCC+ Stable
CMG Media Corp. 1 1015 B Stable
Diamond Sports Group LLC 2 4784 CCC+ Negative
Exela Intermediate LLC Yes 2 1004 CCC- Negative
Full House Resorts Inc. 1 410 B- Stable
iHeartCommunications Inc. 1 1450 B+ Stable
MajorDrive Holdings IV LLC Yes 1 525 B Negative
Mohegan Tribal Gaming Authority 1 1175 B- Stable
National CineMedia LLC 2 630 B- Stable
Royal Caribbean Cruises Ltd. 5 4450 B Negative
Shutterfly LLC 1 750 B- Stable
Skillz Inc. 1 300 CCC+ Stable
Spanish Broadcasting System Inc. 1 310 B- Stable
Staples Inc. 2 3000 B Negative
Viking Cruises Ltd. 2 700 CCC+ 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
W&T Offshore Inc. 1 552 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. 3 1195 B- Negative
Fossil Group Inc. 1 125 B Stable
GPS Hospitality Holding Co. LLC 1 400 B- Negative
Liberty Interactive LLC Yes 4 1253 BB- Negative
Michaels Cos. Inc. (The) 1 1300 B Stable
Party City Holdings Inc. 3 830 B- Negative
QVC Inc. 2 660 BB- Negative
Rite Aid Corp. 3 1504 CCC+ Negative
Telecommunications
DISH DBS Corp. 4 6499 B- Stable
Intrado Corp. 1 685 CCC+ Stable
Northwest Fiber LLC 2 550 B- Stable
United States Cellular Corp. 3 1500 BB Stable
Viasat Inc. 2 1100 BB- Stable
Zayo Group Holdings Inc. 1 1080 B Negative
Transportation
Azul Investments LLP Yes 2 1000 CCC+ Stable
Carriage Purchaser Inc. 1 300 B Stable
Utilities
Calumet Specialty Products Partners L.P. 2 875 B- Stable
CSI Compressco L.P. 1 155 B- Stable
NGL Energy Finance Corp. Yes 3 1171 B Negative
Summit Midstream Finance Corp. Yes 1 259 B Stable
Data as of July 5, 2022. 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
Ratings Performance Research:Nick W Kraemer, FRM, New York + 1 (212) 438 1698;
nick.kraemer@spglobal.com
Research Contributor:Tanya Dias, Mumbai;
tanya.dias@spglobal.com

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