Distress ratio hits a 14-year low, default forecast falls – S&P Global Ratings

The U.S. distress ratio tightened to 2.6% in May, according to S&P Global Ratings, as speculative-grade composite spreads contracted to seven-year lows amid favorable financing conditions and an improved economic outlook.

In a report published June 14, S&P Global Ratings said the U.S. distress ratio fell to its lowest since October 2007, at 2.6% as of May 17, from 2.9% as of April 30. The agency noted a 32.6 percentage-point decline in the distress ratio since March 2020 (from 35.2%), which represents the sharpest recovery since it began tracking the metric.

Favorable financing conditions since the second quarter of 2020 have shifted the ratings distribution of distressed credits, with the percentage of B and BB rated credits falling to approximately 40% from 75%, while the percentage of CCC credits doubled to around 60% over the same period. The composite spread for the latter group narrowed in May to 614 basis points, from March 2020 highs of over 1,800 bps, as investors mined the market for higher yields.

With bankruptcies and payment misses continuing to decline amid growing signs of economic recovery, S&P Global Ratings in May said the U.S. trailing-12-month speculative-grade corporate default rate is now projected to fall to 4% by March 2022, from 6.3% in March 2021.

The highest distress ratios were concentrated in the metals, mining and steel sector; the insurance sector; and the oil and gas sector, although the rates are low compared with sector averages at this point in 2020. The media and entertainment sector has one of the highest proportions of distressed credits, at 10%, and has the highest negative bias among all sectors, at 39.7% as of May 17.