(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.)
Key Takeaways
- The count of 'CCC+' and below rated issuers decreased by 15 since December 2023 to 168--it's the steepest drop since the fourth quarter of 2021.
- Despite a drop in the tally, many of the removals in the first quarter were because defaults and downgrades to the 'CCC+' and below category materially outpaced upgrades.
- Speculative-grade issuance increased by 84% compared with the first quarter of 2022, as some companies were able to access much needed capital because of investor demand.
- 'CCC+' and below reported leverage and reported EBITDA coverage credit measures are stabilizing but remain weak.
Highlights
Risky credits in North America fell by 8.2% in the first quarter of 2024--its largest quarterly drop in two years. Despite the positive downward trend in risky credits, many of the removals were because there was a larger number of U.S. defaults in the first quarter, which contributed to 42% of total risky credit removals.
Chart 1
Chart 2
The number of issuers downgraded into the 'CCC+' and below rating category outpaced the number of issuers upgraded out of the category by 10 to four. Health care led downgrades with three and the high tech and media sectors had two each. The media and entertainment sector also led upgrades out of the 'CCC+' and below rating category in the first quarter, including print-based customer service provider Vericast Corp. and fitness solution provider Patchell Holdings Inc. to 'B-' after improving their cash and operating performance.
Chart 3
Speculative-grade issuance rose in the first quarter, fueled by rising investor risk appetite. First-quarter year-to-date 2024 speculative-grade bond issuance increased by 63% and 84% from first quarter 2023 and 2022, respectively. Even some issuers at the lowest end of the credit spectrum were able to tap into markets as 'CCC+' and below year-to-date bond issuance volumes increased to $2 billion in the first quarter of 2024, from $1.5 billion in the fourth quarter of 2023. However, most of the issuance the first quarter came from the 'B' and 'BB-' rating categories, accounting for 24% and 22% of total speculative-grade issuance, respectively.
Chart 4
More than 55% of 'CCC+' and below rated issuers reported leverage over 10x and EBITDA interest coverage deficits. Despite a modest decline in the number of 'CC+' and below rated issuers with reported leverage over 10x, the higher interest rates caused a spike in the number of issuers reporting interest coverage deficits and free cash flow shortfalls.
Chart 5
Our analysts forecast that improving performance and declining rates could result in reported leverage falling more than 2x. Additionally, S&P Global Ratings' forecasts suggest that the percentage of 'CCC+' and below rated issuers with reported interest coverage deficits could fall below 50% by year-end 2024. However, our expectations for a healthy rebound continues to moderate.
Chart 6
U.S. BSL CLOs at least partially exposed to downgrade of Altice Europe N.V. Since the start of the year, a handful of widely held U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) obligors have had downgrades. A large majority of U.S. BSL CLOs have at least some exposure to parent issuer Altice Europe N.V.; on average, based on the most recent reports we have available to us, the company represents 0.8% of U.S. BSL CLO assets. Following the downgrades of Altice Europe N.V.'s subsidiaries, Altice France and Numericable, on March 28, 2024, the average U.S. BSL CLO 'CCC' bucket across reinvesting transactions increased to 7.18% from 6.24% in March, before increasing further to 7.27% by April 22. Most reinvesting BSL CLOs are still below their 7.5% 'CCC' threshold.
Table 1
BSL CLO index metrics (CLO insights 2024 U.S. BSL index) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
BSL | 'B-' bucket (%) | 'CCC' bucket (%) | CreditWatch negative (%) | Outlook negative (%) | ||||||
Jan. 31, 2024 | 26.27 | 6.67 | 0.34 | 18.27 | ||||||
Feb. 29, 2024 | 26.64 | 6.24 | 0.51 | 16.89 | ||||||
Mar. 31, 2024 | 26.42 | 7.18 | 0.65 | 16.44 | ||||||
Apr. 22, 2024 | 25.93 | 7.27 | 0.91 | 16.83 | ||||||
BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings. |
Table 2
Upgrades from 'CCC' category beginning 2024 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating date | Issuer | Country | Sector | Rating to | Rating from | Debt (Mil. USD) | ||||||||
Jan. 26, 2024 |
Artera Services LLC |
U.S. | Capital goods | B- | CCC+ | 5,432 | ||||||||
Mar. 21, 2024 |
Vericast Corp. |
U.S. | Media and entertainment | B- | CCC | 2,743 | ||||||||
Mar. 14, 2024 |
Patchell Holdings Inc. |
Canada | Media and entertainment | B- | CCC+ | 463 | ||||||||
Mar. 05, 2024 |
KAMC Holdings Inc. |
U.S. | Consumer products | B- | CCC+ | 445 | ||||||||
Data as of March 31, 2024. Source: S&P Global Credit Research & Insights. |
Table 3
Downgrades into the 'CCC' category beginning 2024 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rating date | Issuer | Country | Sector | Rating to | Rating from | Debt (Mil. USD) | ||||||||
Mar. 01, 2024 |
iHeartMedia Inc. |
United States | Media and entertainment | CCC+ | B | 6,051 | ||||||||
Jan. 12, 2024 |
GoTo Group Inc. |
United States | High technology | CCC+ | B- | 3,000 | ||||||||
Mar. 11, 2024 |
WW International Inc. |
United States | Consumer products | CCC+ | B- | 1,500 | ||||||||
Jan. 04, 2024 |
Hughes Satellite Systems Corporation (EchoStar Corporation) |
United States | Telecommunications | CCC+ | BB | 1,500 | ||||||||
Jan. 16, 2024 |
Baffinland Iron Mines Corp. |
Canada | Metals, mining, and steel | CCC | B- | 1,150 | ||||||||
Feb. 27, 2024 |
Cumulus Media Inc. |
United States | Media and entertainment | CC | B- | 1,025 | ||||||||
Feb. 06, 2024 |
Pluto Acquisition I Inc. |
United States | Health care | CC | B- | 873 | ||||||||
Mar. 15, 2024 |
American Rock Salt Co. LLC |
United States | Metals, mining, and steel | CCC+ | B- | 600 | ||||||||
Mar. 26, 2024 |
Sandvine LP |
Canada | High technology | CCC | B- | 510 | ||||||||
Mar. 12, 2024 |
Emergent BioSolutions Inc. |
United States | Health care | CCC+ | B- | 450 | ||||||||
Data as of March 31, 2024. Source: S&P Global Credit Research & Insights. |
.
Related Research
- This Month In Credit, April 29, 2024
- Vericast Corp. Upgraded To 'B-' On Improved Cash Flow Following Valassis Sale, Outlook Stable, March 22, 2024
- Patchell Holdings Inc. Upgraded To 'B-' From 'CCC+' On Improving Operating Performance; Outlook Stable, March 15, 2024
- Industry Credit Outlook 2024: Media and Entertainment, Jan. 9, 2024
This report does not constitute a rating action.
Credit Markets Research: | Nicole Serino, New York + 1 (212) 438 1396; nicole.serino@spglobal.com |
Secondary Contacts: | Patrick Drury Byrne, Dublin (00353) 1 568 0605; patrick.drurybyrne@spglobal.com |
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 | |
Daniel Hu, FRM, New York + 1 (212) 438 2206; daniel.hu@spglobal.com | |
Research Contributor: | Vaishali Singh, Pune; vaishali.singh2@spglobal.com |
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