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Credit Trends: Risky Credits: U.S. And Canadian Risky Credits Drop For Third Straight Quarter Amid Sector Divergences

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Credit Trends: U.S. Corporate Bond Yields As Of Nov. 20, 2024

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Private Credit Could Bridge The Infrastructure Funding Gap

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The Opportunity Of Asset-Based Finance Draws In Private Credit

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Private Credit Casts A Wider Net To Encompass Asset-Based Finance And Infrastructure


Credit Trends: Risky Credits: U.S. And Canadian Risky Credits Drop For Third Straight Quarter Amid Sector Divergences

(Editor's Note: Our "Risky Credits" series focuses on U.S. and Canadian corporate issuers rated 'CCC+' and lower. Because many defaults are of companies in those categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)

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Key Highlights

Overall, the risk of default in North America is decreasing as the number of risky credits fall for the third consecutive quarter.   The number of North American issuers rated 'CCC+' and below declined to 155 as of September 2024--20 below its five-year average. For the first time this year, removals from the risky credits list were primarily due to upgrades from ' CCC+' and lower, rather than defaults, which is a positive indicator. Additionally, the count of 'B-' rated issuers on CreditWatch negative or outlook has decreased by 15 during the same period. This suggests that the risk of downgrades to 'CCC+' and below is diminishing.

Despite the decrease in issuer count, 'CCC+' and below debt levels remain elevated at $337 billion, 25% above its five-year average of around $250 billion.   The high levels of debt are primarily driven by U.S. telecommunications and health care companies, together accounting for more than half of the regions' total ' CCC+' and below rated debt. Additionally, 94% of the debt within these sectors have a negative outlook or are on CreditWatch negative, making these issuers at an even higher risk for default.

Chart 1

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Chart 2

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Chart 3

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Despite leading the North American 2024 default tally through September, the consumer products and media and entertainment sectors continue to lead with the largest number of issuers rated ' CCC+' and below, with 32 and 26, respectively.   Even as the number of risky credits fell from September 2023 across most sectors, five sectors (including consumer products, metals, mining and steel, high technology, and transportation) had increases in the number of issuers rated ' CCC+' and below, led by consumer products with three issuers. The operating environment for this sector is challenging as it continues to be the most exposed to strained discretionary spending and still elevated interest rates. Meanwhile, the media and entertainment and health care sectors had the largest decreases in the number of risky credits, falling by nine and five, respectively, since last September, largely driven by high numbers of defaults rather than improved credit.

Chart 4

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Chart 5

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Reported Debt to EBITDA for 'CCC+' and below was mixed across sectors.   Overall debt to EBITDA fell to 10.8x from 12.5x from the previous quarter, with around half of the sectors having a decrease in their weighted averaged adjusted debt to EBITDA ratios. Meanwhile, other sectors like telecommunications and business and consumer services had increases in their debt to EBITDA weighted averages due to both weaker operating performance and a still high interest rate environment. Issuers continue to focus on liquidity for the remainder of 2024.

Chart 6

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Collateralized loan obligations (CLO) metrics continue to improve.   Haircuts from default exposures (exposures that don't qualify as current pay) have declined notably since earlier in the year and have held steady since July, despite the downgrade of widely held Lumen/Level 3 in early September. Across September and early October trustee reports, Lumen Technologies/Level 3 and Tosca Services exposure made up a large majority of current pay buckets across CLO portfolios (because Lumen/Level 3 exposures across several transactions were counted as current pay, many transactions did not have a default haircut for those exposures across their OC ratios). Meanwhile, haircuts from excess 'CCC' exposures have declined in August and September, resulting in a decline in overall overcollateralized (OC) haircuts. Despite the decline in haircuts to the OC numerator, OC cushions across our index of reinvesting transactions have declined by 0.74% on average (down to 3.84% from 4.58% a year ago), mostly driven by par loss across the portfolios of 0.71% during the same time (as a percentage of target par balances).

Table 1

Collateralized loan obligation BSL index metrics (CLO insights 2022 U.S. BSL index)
As of date 'B-' (%) CCC' bucket Non-perform bucket CreditWatch neg Outlook neg
10/31/2023* 27.29 7.59 0.50 0.95 17.78
11/30/2023* 26.84 7.27 0.4 1.02 18.19
12/31/2023* 26.39 7.17 0.50 0.95 17.94
1/31/2024* 26.24 6.53 0.92 0.36 18.01
2/29/2024* 26.57 6.11 1.02 0.53 16.69
3/31/2024* 26.34 6.93 0.77 0.66 16.23
4/30/2024* 25.88 6.55 1.01 0.93 16.05
5/31/2024* 25.60 6.74 0.52 0.95 15.73
6/30/2024* 25.47 6.44 0.42 1.16 15.16
7/31/2024* 25.36 6.52 0.34 0.98 15.25
8/30/2024* 25.33 6.48 0.59 1.14 14.91
9/30/2024** 25.23 6.54 0.62 1.46 15.12
10/22/2024*** 25.14 6.65 0.65 1.40 14.73
*index metrics based on end of month ratings and pricing data and as of month portfolio data available. **index metrics based on Sept. 30, 2024 ratings and pricing data and latest portfolio data available to us. ***index metrics based on Oct. 22, 2024 ratings and pricing data and latest portfolio data available to us.

Table 2

Downgrades into 'CCC' category beginning 2024
Rating date Issuer Country Sector Rating to Rating from
5/15/2024 Altice USA, Inc. U.S. Telecommunications CCC+ B-
3/1/2024 iHeartMedia Inc. U.S. Media and entertainment CCC+ B
5/10/2024 Connect Holding II LLC U.S. Telecommunications CCC B-
8/16/2024 Gainwell Holding Corp. U.S. Health care CCC+ B-
8/22/2024 GrafTech International Ltd. U.S. Metals, mining and steel CCC+ B-
7/18/2024 CMG Media Corporation (CMG Holdings, Inc.) U.S. Media and entertainment CCC+ B-
1/12/2024 GoTo Group, Inc. U.S. High technology CCC+ B-
5/20/2024 Calumet Specialty Products Partners LP U.S. Utility CCC+ B-
9/20/2024 Naked Juice LLC U.S. Consumer products CCC+ B-
8/9/2024 EmployBridge Holding Co U.S. Media and entertainment CCC+ B-
7/23/2024 Corus Entertainment Inc. Canada Media and entertainment CCC B-
8/19/2024 Redstone Buyer LLC U.S. High technology CCC+ B-
4/4/2024 Athletico Holdings, LLC U.S. Health care CCC+ B-
4/12/2024 Pathway Vet Alliance LLC U.S. Health care CCC+ B-
5/24/2024 LD Holdings Group LLC U.S. Financial institutions CCC+ B-
7/18/2024 Allen Media, LLC U.S. Media and entertainment CCC+ B-
1/4/2024 Hughes Satellite Systems Corporation (EchoStar Corporation) U.S. Telecommunications CCC+ BB
3/11/2024 WW International, Inc. U.S. Consumer products CCC+ B-
7/24/2024 Franchise Group Inc. U.S. Retail/Restaurants CCC+ B-
5/10/2024 Forest City Realty Trust Inc. (Brookfield Corporation) U.S. Homebuilders/Real Estate Co. CCC+ B-
1/16/2024 Baffinland Iron Mines Corp. Canada Metals, mining and steel CCC B-
2/27/2024 Cumulus Media Inc. U.S. Media and entertainment CC B-
6/13/2024 Upstream Newco, Inc. U.S. Health care CCC+ B
6/5/2024 American Tire Distributors Inc. U.S. Automotive CCC+ B-
8/28/2024 Optiv, Inc. U.S. High technology CCC+ B-
2/6/2024 Pluto Acquisition I, Inc. U.S. Health care CC B-
6/17/2024 PAI Holdco, Inc. U.S. Retail/Restaurants CCC+ B-
6/28/2024 EagleView Technology Corp. U.S. Media and entertainment CCC B-
5/29/2024 Cobra Holdings, Inc. (Confluence Technologies, Inc.) U.S. Consumer products CCC+ B-
5/2/2024 Del Monte Foods, Inc. U.S. Consumer products CCC+ B-
3/15/2024 American Rock Salt Company LLC U.S. Metals, mining and steel CCC+ B-
4/30/2024 Dodge Construction Network LLC U.S. Consumer products CCC+ B-
5/2/2024 SIRVA Inc. U.S. Consumer products CCC B-
3/26/2024 Sandvine LP Canada High technology CCC B-
7/22/2024 Congruex Group LLC U.S. Capital goods CCC B-
3/12/2024 Emergent BioSolutions Inc. U.S. Health care CCC+ B-
9/27/2024 Thrive Merger Sub, LLC U.S. Health care CCC+ B-
5/10/2024 TJC Spartech Acquisition Corp. (Spartech Parent Corp.) U.S. Capital goods CCC+ B-
8/29/2024 Berry Corporation U.S. Oil and gas exploration and production CCC+ B-
5/24/2024 Lereta, LLC U.S. Media and entertainment CCC+ B-
6/13/2024 Vertex Energy, Inc. U.S. Utility CCC B-
8/23/2024 TMK Hawk Parent, Corp. U.S. Consumer products CCC B-
7/3/2024 Container Store Group, Inc. (The) U.S. Retail/Restaurants CCC+ B-
6/21/2024 Aegis Toxicology Sciences Corporation (Aegis Acquistion, Inc.) U.S. Health care CCC+ B-
Data as of Sept. 30, 2024. Source: S&P Global Credit Research & Insights.

Table 3

Upgrades from 'CCC' category beginning 2024
Rating date Issuer Country Sector Rating to Rating from
8/14/2024 Carvana Co. U.S. Automotive B- CCC+
1/26/2024 Artera Services, LLC U.S. Capital goods B- CCC+
4/12/2024 Michaels Companies, Inc. (The) U.S. Retail/Restaurants B- CCC+
3/21/2024 Vericast Corp. U.S. Media and entertainment B- CCC
8/15/2024 Team Health Holdings, Inc. U.S. Health care B- CCC
4/11/2024 Five Point Holdings, LLC U.S. Homebuilders/Real Estate Co. B- CCC+
9/26/2024 Glatfelter Corp. U.S. Forest products and building materials B+ CCC+
6/4/2024 Bulldog Purchaser Inc. U.S. Media and entertainment B- CCC+
6/6/2024 Triumph Group Inc. U.S. Aerospace and defense B- CCC+
7/31/2024 Syniverse Corporation U.S. Telecommunications B- CCC+
5/7/2024 Aptim Corp. U.S. Capital goods B- CCC+
7/23/2024 Kronos Worldwide Inc. U.S. Chemicals, packaging and environmental services B- CCC+
4/22/2024 Hubbard Radio, LLC U.S. Media and entertainment B- CCC+
6/7/2024 IXS Holdings, Inc. U.S. Automotive B- CCC+
7/30/2024 MicroStrategy Inc. U.S. High technology B- CCC+
3/14/2024 Patchell Holdings Inc. Canada Media and entertainment B- CCC+
9/11/2024 Emergent BioSolutions Inc. U.S. Health care B- CCC
4/19/2024 IAMGOLD Corporation Canada Metals, mining and steel B- CCC+
3/5/2024 KAMC Holdings, Inc. U.S. Consumer products B- CCC+
8/20/2024 Power Stop LLC U.S. Automotive B- CCC+
8/29/2024 Great Lakes Dredge & Dock Corp. U.S. Capital goods B- CCC+
4/8/2024 LendingTree, Inc. U.S. Media and entertainment B- CCC+
Data as of Sept. 30, 2024. Source: S&P Global Credit Research & Insights.

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
Secondary Contact:Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Research Contributor:Suresh N Kasa, Mumbai;
suresh.kasa@spglobal.com

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