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COMMENTS

Credit Trends: Risky Credits: U.S. And Canada Default Risk Rises As Lower Ratings Deteriorate

COMMENTS

This Month In Credit: 2024 Data Companion

COMMENTS

Default, Transition, and Recovery: The U.S. Leveraged Loan Default Rate Is Set To Remain Near 1.5% Through June 2025

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of Sept. 18, 2024

COMMENTS

Default, Transition, and Recovery: Monthly Defaulted Debt More Than Doubled To $14.9 Billion In August


Credit Trends: Risky Credits: U.S. And Canada Default Risk Rises As Lower Ratings Deteriorate

(Editor's Note: Our "Risky Credits" series focuses on U.S. and Canadian 'CCC' category rated corporate issuers, as well as issuers rated 'B-', because most defaults are typically by issuers rated in the 'CCC' category or rated 'B-' with a negative outlook or on CreditWatch negative.)

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Key Highlights In September

The 'CCC+ and below' rated population will likely increase in the fourth quarter as the number of risky 'B-' issuers is rapidly increasing (see chart 1).  The number of 'B-' with a negative outlook and CreditWatch jumped by nearly 60% since June, with a net 19 additions amounting to US$31 billion in debt outstanding (see chart 2). Thus, the negative bias of the 'B-' rated issuers increased to 12.2% from 7.7%, and the downward transition (3-month trailing) from 'B' to 'B-' doubled to 2.4% from 1.2% in the last quarter.

The largest percentage of issuers added to the 'B-' tally were in the media and entertainment sector.  Many issuers in the sector saw some post-pandemic positive momentum in the first half of 2022 but are beginning to feel the effects of higher inflation eroding purchasing power and limiting consumer spending. As we do not expect economic or financing conditions to improve in the near term, we can expect to see a continued upward trend in the number of 'CCC+' and below rated issuers in the region and, thus, an increased risk for defaults.

Chart 1

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Chart 2

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Consumer products sector is the most exposed to default risk.  The consumer products sector led with the most additions into the 'CCC+ and below' rating category last quarter. The consumer products sector now has the most 'CCC+ and below' debt exposure, with roughly $24.1 billion in rated debt-- 90% of which has a negative bias.

Chart 3

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The U.S. speculative grade default rate could reach 3.5% by June 2023.  We expect the U.S. trailing 12-month speculative grade corporate default rate to reach 3.5% by June 2023, from 1.4% in June 2022. To reach this baseline forecast, 65 speculative grade companies would need to default. So far in 2022 we have seen an aggregate of 30 defaults in North America through the end of September--still lower than its previous year-to-date level.

CLO credits show marginal deterioration.  U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) credit metrics have hit an inflection point in recent months and started to turn towards the negative. U.S. BSL CLO collateral pools have seen their average 'CCC' exposure tick up in each of the past couple of months after hitting a low of 4.0% in August. Negative corporate rating outlooks--a key forward-looking indicator of potential changes to the credit landscape--hit a low of 9.53% in U.S. BSL CLO collateral pools back in May and have been creeping upward each month since. However, given these are actively managed vehicles, managers have the option to trade rebalance their portfolios.

Table 1

CLO BSL Index Metrics (CLO Insights 2022 U.S. BSL Index)
BSL 'B-' bucket 'CCC' bucket Non-perform bucket CreditWatch Neg Outlook Neg
Jan-22 26.41 4.94 0.17 0.88 12.33
Feb-22 27.16 4.27 0.37 0.28 11.94
Mar-22 27.09 4.26 0.39 0.11 11.35
Apr-22 27.44 4.17 0.13 1.06 10.86
May-22 27.76 4.26 0.14 1.20 9.83
Jun-22 27.70 4.14 0.20 1.27 10.46
Jul-22 28.59 4.01 0.35 1.35 11.08
Aug-22 28.70 4.00 0.34 1.46 11.53
Sep-22 29.00 4.21 0.59 1.03 12.20
Oct-22 28.85 4.40 0.50 1.16 13.36
BSL CLO--Broadly syndicated loan collateralized loan obligation. Data as of Sept. 30, 2022.

Consumer products sector with a weighted average adjusted leverage of 20.5x is most exposed to a cyclical downturn.  The other highly cyclical sectors with high leverage are business and consumer services, media/entertainment, and cap goods could see higher topline and margin pressure as we proceed into early 2023. Real estate and chemicals sectors lead with the highest median leverage but only on one issuer each so sector exposure is minimal.

Chart 4

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Table 2

Downgrades To 'CCC/C' Rating Category In 2022
Rating date Issuer Country Sector Rating to Rating rrom Debt (U.S. $ mil.)
8/1/2022 Bausch Health Cos. Inc. Canada Health Care CCC+ B $44,402
4/14/2022 Talen Energy Supply LLC (Talen Energy Corp.) U.S. Utilities CCC B- $6,329
5/3/2022 Intrado Corp. U.S. Telecommunications CCC+ B- $5,407
3/10/2022 VEON Ltd. Bermuda Telecommunications CCC+ BB+ $5,306
8/24/2022 Artera Services, LLC U.S. Capital Goods CCC+ B- $3,952
9/12/2022 Brand Industrial Services Inc., U.S. Capital Goods CCC+ B- $3,825
5/11/2022 Diebold Nixdorf Inc. U.S. High Technology CCC+ B- $3,207
3/31/2022 Monitronics International Inc. U.S. Media & Entertainment CCC+ B- $3,123
7/29/2022 Avaya Holdings Corp. U.S. High Technology CCC B- $2,943
8/12/2022 Party City Holdings Inc., (PC Nextco Holdings LLC) U.S. Retail/Restaurants CCC+ B- $2,923
9/12/2022 U.S. Renal Care Inc. U.S. Health Care CCC+ B- $2,330
5/19/2022 Rite Aid Corp. U.S. Retail/Restaurants CCC+ B- $2,269
8/23/2022 Audacy Inc. U.S. Media & Entertainment CCC+ B- $1,780
9/23/2022 Wheel Pros Inc., U.S. Automotive CCC+ B- $1,540
7/29/2022 Weber Inc. U.S. Consumer Products CCC+ B $1,500
8/22/2022 Bed Bath & Beyond Inc. U.S. Retail/Restaurants CCC B- $1,500
3/11/2022 Logan Group Co. Ltd. Cayman Islands Homebuilders/Real Estate Co. CCC- B- $1,280
9/29/2022 National CineMedia Inc. U.S. Media & Entertainment CCC B- $1,220
9/19/2022 Five Point Holdings, LLC U.S. Homebuilders/Real Estate Co. CCC+ B- $1,200
2/25/2022 Cooper-Standard Holdings Inc., U.S. Automotive CCC+ B- $990
5/26/2022 TecoStar Holdings Inc., U.S. Health Care CCC+ B- $950
5/3/2022 Carestream Health Inc. U.S. Health Care CC B- $948
5/25/2022 Carrols Restaurant Group Inc., U.S. Retail/Restaurants CCC+ B- $800
2/25/2022 8th Avenue Food & Provisions Inc., U.S. Consumer Products CCC+ B- $750
6/17/2022 Canopy Growth Corp. Canada Consumer Products CCC B- $750
7/18/2022 IXS Holdings Inc., U.S. Automotive CCC+ B- $620
9/30/2022 Lucky Bucks, LLC U.S. Media & Entertainment CCC B $555
8/17/2022 Traeger Inc., U.S. Consumer Products CCC+ B $510
4/27/2022 Phoenix Services International LLC U.S. Metals, Mining & Steel CCC+ B $465
6/8/2022 P&L Development Holdings, LLC U.S. Consumer Products CCC+ B- $465
4/14/2022 NSA International, LLC U.S. Consumer Products CCC B- $450
1/31/2022 Halo Buyer Inc. U.S. Consumer Products CCC+ B- $440
2/11/2022 INW Manufacturing, LLC U.S. Consumer Products CCC+ B- $440
4/14/2022 CoolSys Inc., U.S. Consumer Products CCC+ B- $440
6/3/2022 CareerBuilder, LLC U.S. Media & Entertainment CCC B- $415
3/22/2022 PlayPower Holdings Inc. U.S. Media & Entertainment CCC+ B- $400
9/2/2022 Fly Leasing Ltd. Bermuda Transportation CCC- B- $391
8/19/2022 QualTek LLC U.S. Capital Goods CCC+ B- $380
3/15/2022 The Cleaver-Brooks Co. Inc., U.S. Capital Goods CCC B- $375
9/16/2022 Blue Ribbon, LLC (Blue Ribbon Intermediate Holdings LLC) U.S. Consumer Products CCC+ B- $368
2/9/2022 Lannett Co. Inc., U.S. Health Care CCC+ B- $350
5/12/2022 pH Beauty Holdings I Inc., U.S. Consumer Products CCC+ B- $340
2/11/2022 Moran Foods, LLC (SAL Acquisition Corp.) U.S. Retail/Restaurants CCC+ B- $334
4/1/2022 CNG Holdings Inc., U.S. Financial Institutions CCC+ B- $310
3/29/2022 Skillz Inc. U.S. Media & Entertainment CCC+ B- $300
3/18/2022 JHW Alphia Holdings Inc. U.S. Consumer Products CCC+ B- $285
8/26/2022 Sierra Enterprises LLC U.S. Consumer Products CCC+ B- $282
6/23/2022 Vida Capital Inc., U.S. Financial Institutions CCC B- $275
2/7/2022 Data Axle Inc. U.S. Media & Entertainment CCC B- $250
9/9/2022 UC Holdings Inc. (Chassix Holdings Inc.,) U.S. Automotive CCC+ B- $225
9/12/2022 Wahoo Fitness Acquisition LLC U.S. Consumer Products CCC B- $225
8/19/2022 Array Midco Corp., Canada Consumer Products CCC+ B- $27
Source: S&P Global Ratings. Data as of Sept. 30, 2022.

Table 3

Upgrades From 'CCC' Category In 2022
Rating date Issuer Country Sector Rating to Rating from Debt (U.S. $ mil.)
8/23/2022 Bombardier Inc. Canada Aerospace & Defense B- CCC+ $6,360
2/17/2022 Nabors Industries Ltd. Bermuda Oil & Gas Exploration & Production B- CCC+ $5,101
5/23/2022 Varsity Brands Holding Co. Inc. U.S. Consumer Products B- CCC+ $3,100
1/18/2022 Syniverse Holdings Inc., (Syniverse Technologies Corp.) U.S. Telecommunications B- CCC+ $2,922
2/4/2022 Apex Tool Group, LLC U.S. Forest Products & Building Materials B- CCC $2,729
4/5/2022 DTI Holdco Inc., U.S. Media & Entertainment B- CCC+ $2,155
4/4/2022 KUEHG Corp. U.S. Media & Entertainment B- CCC+ $1,387
8/17/2022 Peabody Energy Corp. U.S. Metals, Mining & Steel B- CCC+ $1,382
6/23/2022 Fitness International, LLC U.S. Media & Entertainment B- CCC+ $1,275
6/10/2022 Spectacle Bidco Holdings Inc. Canada Media & Entertainment B- CCC+ $1,232
1/12/2022 National CineMedia Inc. U.S. Media & Entertainment B- CCC+ $1,220
7/29/2022 Hovnanian Enterprises Inc. U.S. Homebuilders/Real Estate Co. B- CCC+ $1,166
1/20/2022 Electronics for Imaging Inc., U.S. High Technology B- CCC+ $1,100
7/8/2022 WaterBridge Operating LLC (WaterBridge Resources, LLC) U.S. Oil & Gas B- CCC+ $1,000
6/10/2022 Spring Education Group Inc. U.S. Media & Entertainment B- CCC+ $866
9/23/2022 SIRVA Inc. U.S. Transportation B- CCC+ $850
7/28/2022 Vantage Specialty Chemicals Inc. U.S. Chemicals, Packaging & Environmental Services B- CCC+ $758
4/4/2022 Learning Care Group (US) No. 2 Inc. (Learning Care Group (US) Inc.) U.S. Media & Entertainment B- CCC+ $710
5/13/2022 Jazz Acquisition Inc. (Wencor Group LLC) U.S. Aerospace & Defense B- CCC+ $610
2/25/2022 Yellow Corp. U.S. Transportation B- CCC+ $600
8/25/2022 JSG I Inc. U.S. Capital Goods B- CCC+ $460
4/25/2022 Cornerstone Chemical Co. U.S. Chemicals, Packaging & Environmental Services B- CCC+ $450
4/12/2022 BEP Ulterra Holdings Inc. U.S. Oil & Gas B- CCC+ $415
3/14/2022 Salem Media Group Inc. U.S. Media & Entertainment B- CCC+ $370
9/9/2022 New TMW LLC U.S. Consumer Products B- CCC+ $365
2/23/2022 Screenvision, LLC U.S. Media & Entertainment B- CCC+ $350
5/6/2022 Shape Technologies Group Inc., U.S. Capital Goods B- CCC+ $350
6/14/2022 KC Culinarte Holdings LP U.S. Consumer Products B- CCC+ $313
1/13/2022 JW Aluminum Continuous Cast Co. U.S. Metals, Mining & Steel B- CCC+ $300
8/12/2022 Miller's Ale House Inc., U.S. Retail/Restaurants B- CCC+ $291
9/1/2022 Calceus Acquisition Inc., U.S. Consumer Products B- CCC+ $290
4/21/2022 RCP Vega Inc., U.S. High Technology B- CCC+ $260
2/8/2022 Crew Energy Inc. Canada Oil & Gas B- CCC+ $235
Source: S&P Global Ratings. Data as of Sept. 30, 2022.

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
Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Leveraged Finance:Ramki Muthukrishnan, New York + 1 (212) 438 1384;
ramki.muthukrishnan@spglobal.com
Minesh Patel, CFA, New York + 1 (212) 438 6410;
minesh.patel@spglobal.com
Secondary Contact:Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Research Contributor:Yogesh Kumar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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