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Credit Trends: Risky Credits: Retail And Health Care Drive Higher Default Risk In The U.S. And Canada

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Credit Trends: Risky Credits: Retail And Health Care Drive Higher Default Risk In The U.S. And Canada

(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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Highlights

Default risk is increasing for sectors that already had high levels of defaults.   The number of companies rated 'CCC+' and below increased to 165 in March 2023 from 161 in December 2022, driven by an uptick in issuers from the retail and health care sectors. Both sectors experienced the largest net increase in 'CCC+' and below rated issuers over the last quarter. For the retail sector in particular, some lower rated U.S. and Canadian issuers are dealing with higher inflation, which we expect will continue this year, and slowing sales as consumer pull back on discretionary spending.

Meanwhile, the media and entertainment and consumer products sectors still have the most issuers rated 'CCC+' and below, although levels have been dropping--mostly due to an increase in the number of defaults from these sectors. These four sectors led defaults in the U.S. and Canada in the first quarter and helped drive the near 150% quarter over quarter increase. Given the elevated number of issuers still in the 'CCC' category, we expect more defaults ahead.

The year-to-date global corporate default tally reached 37 as of March 31, 2023, driven by an increase in defaults from the U.S. Our current forecast estimates that the U.S. trailing 12-month speculative grade corporate default rate could reach 4% by December 2023--up from its current levels of 2.5% in March 2023 (see "Growing Strains Could Push The U.S. Speculative-Grade Corporate Default Rate To 4% By December 2023," Feb. 16, 2023).

Chart 1

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Chart 2

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Chart 3

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By debt amount, health care leads with nearly a third of all 'CCC+' and below outstanding debt.  This amounts to $82 billion in debt outstanding, 92% of which is on negative outlook or CreditWatch negative. All three health care companies downgraded to 'CCC+' from 'B-'in the first quarter of 2023 cited margin pressures due to higher costs driven by long-standing inflation or labor shortages as the main driver for the action.

Chart 4

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Chart 5

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Risk aversion by investors amid the March banking turmoil has led to tighter financing conditions for speculative-grade issuers.   'CCC+' and below year-to-date bond issuance volumes fell by 83% year over year as investors stepped back. Meanwhile, overall year-to-date speculative-grade bond issuance in the region increased by 13% to $37 billion as of March 2023. Much of the speculative-grade issuance occurred at the start of the quarter, when markets were more optimistic about the credit outlook.

Chart 6

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CLO credits metrics slightly weaken so far in 2023.  The slowdown in economic growth, coupled with inflationary pressures and rising interest rates, continues to weigh on companies with high leverage and low interest coverage ratios. Consequently, in March 2023, the count of downgrades across U.S. broadly syndicated loan collateralized loan obligation (BSL CLO) obligors hit its highest point since the depths of the pandemic-driven downturn in 2020. March also saw a number of defaults, with five issuers seeing ratings lowered to 'SD' and seven lowered to 'CC' or 'D'. On a positive note, nine issuers saw ratings raised to a 'CCC' category rating from 'SD' (see table 1).

As a result, the month-over-month average exposure to assets with a rating below 'CCC-' did not change much in March (0.71% vs 0.70% in February), though the increase in exposure to non-performing assets in February and March did have an impact on junior overcollateralization cushions, which declined to 4.25% from 4.35%. 'CCC' category exposures increased further, to 5.3% from 5.1%, while exposure to issuers rated 'B-' with a negative rating outlook increased slightly to 4.3% from 4.1%.

The overall proportion of CLO assets from obligors with a negative rating outlook has inched up as well, to 16.8% from 16.3%. Combined with assets from obligors with a rating on CreditWatch negative, currently 0.44%, this gives us 17.24% of CLO assets having a negative rating bias, the highest level since September 2021.

Table 1

Broadly syndicated loans collateralized loan obligations risk metrics (CLO insights 2023 U.S. BSL index)
(%) 'B-' bucket 'CCC' bucket Non-perform bucket CreditWatch negative Outlook negative ‘B-’ on negative outlook
Jan. 2023 30.03 5.23 0.50 0.14 15.18 3.84
Feb. 2023 30.09 5.48 0.41 0.22 15.76 3.94
Mar. 2023 30.52 5.14 0.71 0.35 16.33 4.14
Apr. 2023 30.53 5.32 0.70 0.44 16.77 4.28
Data as of March 1, 2023. BSL CLO--Broadly syndicated loan collateralized loan obligation.

Table 2

Downgrades into 'CCC' category beginning 2023
Issuer Country Sector Rating to Rating from Debt amount (mil. $)
2/28/2023

OT Merger Corp.

United States Capital goods CCC+ B- 1,150
3/17/2023

Token Buyer Inc.

United States Capital goods CCC+ B- 470
3/29/2023

Great Lakes Dredge & Dock Corp.

United States Capital goods CCC+ B 325
3/17/2023

Poseidon Investment Intermediate L.P.

United States Chemicals, packaging, and environmental services CCC+ B- 1,670
3/16/2023

Innovative Chemical Products Group

United States Chemicals, packaging, and environmental services CCC+ B- 1,330
1/12/2023

City Brewing Co. LLC (Blue Ribbon Holdings LLC)

United States Consumer products CCC B- 850
3/22/2023

Avison Young (Canada) Inc.

Canada Financial institutions CCC+ B- 443
3/31/2023

FinThrive Software Intermediate Holdings Inc.

United States Health care CCC+ B- 1,765
1/4/2023

Curia Global Inc.

United States Health care CCC+ B- 1,190
3/28/2023

WellPath Holdings Inc.

United States Health care CCC+ B- 610
2/16/2023

Diversified Healthcare Trust

United States Homebuilders/real estate co. CCC+ B 2,850
3/24/2023

One Call Corp. (One Call Care Management Inc.)

United States Insurance CCC+ B- 700
2/13/2023

Screenvision LLC

United States Media and entertainment CCC+ B- 350
3/17/2023

Qurate Retail Inc.

United States Retail/restaurants CCC+ B- 6,052
2/17/2023

MED ParentCo L.P.

United States Retail/restaurants CCC+ B- 1,571
1/30/2023

At Home Group Inc.

United States Retail/restaurants CCC+ B- 1,400
1/6/2023

JOANN Inc.

United States Retail/restaurants CCC+ B- 675
2/3/2023

Wok Holdings Inc.

United States Retail/restaurants CCC+ B- 430
2/27/2023

Yellow Corp.

United States Transportation CCC+ B- 600
2/15/2023

Western Global Airlines Inc.

United States Transportation CCC B- 400
1/13/2023

Martin Midstream Partners L.P.

United States Utility CCC B- 691
Data as of March 31, 2023. Source: S&P Global Credit Research And Insights.

Table 3

Upgrades from 'CCC' category beginning 2023
Issuer Country Sector Rating to Rating from Debt amount (mil. $)
1/19/2023 Life Time Inc. United States Media and entertainment B- CCC+ 2,250
1/30/2023 Martin Midstream Partners L.P. United States Utility B- CCC 1,491
1/6/2023 Forum Energy Technologies Inc. United States Oil and gas exploration and production B- CCC+ 328
2/3/2023 JHW Alphia Holdings Inc. United States Consumer products B- CCC+ 285
2/14/2023 W&T Offshore Inc. United States Oil and gas exploration and production B- CCC+ 275
Data as of March 31, 2023. Source: S&P Global Credit Research And Insights.

Related Research

This report does not constitute a rating action.

Credit Research And Insights: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:Vaishali Singh, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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