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COMMENTS

Default, Transition, and Recovery: The Oil And Gas Sector Leads The Distress Ratio


Default, Transition, and Recovery: The Oil And Gas Sector Leads The Distress Ratio

The U.S. distress ratio--defined as the proportion of speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries--decreased to 6.2% as of July 15, 2019, from 6.8% as of June 17. Since last month's report, the distress ratios of seven of the 10 sectors fell. The three sectors with rising distress ratios this month were capital goods, media and entertainment, and telecommunications. The narrowing distress ratio is a sign of conditions in anticipation of reduced interest rates, which were in fact cut by 25 bps on July 31. Lower borrowing costs should prove beneficial for lower-rated issuers, as additional cash will be available to investors, lowering the risk of default.

Chart 1

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Credit Risks Emerge For Lower-Rated Oil And Gas Issuers

The overall U.S. speculative-grade composite spread contracted to 475 bps as of July 17 from 494 bps as of June 17. The spread reached its highest point in 2019 right at the start of the year--Jan. 3--when it reached 578 bps (see Chart 2). The spreads remain well above the one-year moving average of 451 bps but are lower than the five-year moving average of 516 bps.

The overall U.S. speculative-grade composite spread has tightened since May, and the overall distress ratio remains low. However, risk remains in the oil and gas sector, which leads with an 18.4% distress ratio and 33 distressed credits. So far in 2019, credit spreads in the sector widened to 349 bps from 301 bps in February and 231bps in July 2018, signaling risk of funding for lower-rated issuers in the sector (see Chart 2). A number of issuers with distressed issues will face refinancing risks in the short term if financing conditions do not improve, including Unit Corp., Denbury Resources Inc., California Resources Corp., and Pioneer Energy Services Corp. In addition, S&P Global Ratings lowered its Henry Hub natural gas price assumption for the remainder of 2019, 2020 and 2021, further adding to the heightened refinancing risk (see "S&P Global Ratings Lowered Its Henry Hub Natural Gas Price Assumption For The Rest Of 2019 And For 2020, 2021; Long-Term U.S. Natural Gas, Canadian AECO, And Crude Oil Price Assumptions Unchanged," July 29, 2019).

By rating category, spreads have narrowed in 2019 for all rating categories except 'CCC' (see Chart 3). The 'CCC' spread has remained at 917 bps, higher than its one-year average of 880 bps, further signaling additional risks for the lowest-rated issuers looking for cash in the short term.

Chart 2

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Chart 3

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Downgrade Potential Is Still A Concern For The Oil And Gas Sector

By sector, the oil and gas, retail and restaurants, telecommunications, insurance, and forest products and building materials sectors have distress ratio above the overall U.S. distress ratio (see Chart 2). The negative bias (measured by the proportion of ratings with negative outlooks or on CreditWatch with negative implications) of the oil and gas sector greatly exceeds its long-term average. Along with the oil and gas sector, the telecommunications also has higher current negative bias than its long-term negative bias, indicating heightened short-term risk (see Table 1).

Chart 4

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Table 1

The Oil And Gas, Retail, And Telecommunications Sectors Have The Highest Distress Ratios And Cover Almost 62% Of All Distressed Credits. Among The Top Three, Oil And Gas And Telecommunications Face Higher Downgrade Potential.
Distress ratio (%) Current negative bias (%) Long-term average of negative bias* (%)
Oil and gas 18.4 24.8 19.0
Retail/restaurants 16.7 23.9 26.9
Telecommunications 14.7 25.8 25.4
*Negative bias is calculated as the number of U.S. issuers with either a negative outlook or ratings on CreditWatch negative, divided by the total number of U.S. issuers with either positive, negative, or stable outlook or ratings on CreditWatch positive or negative. The long-term average is taken from 1990 to the present. The proportion of 'B-' and lower issues is measured relative to the total number of speculative-grade issues. The statistic is calculated for instruments issued in the U.S. during the trailing three years. The proportion of 'B-' and lower U.S. issuers is measured relative to the total number of U.S. speculative-grade issuers. Data through July 15, 2019. Source: S&P Global Ratings Research.

Surveilling Defaults

The variability in the distress ratio--along with other economic, financial, and credit-related factors--generally corresponds with changes in default rates. For example, the sharp decline in the default rate of energy companies over the past two years has contributed to the decline in the overall distress ratio (see Chart 1).

The economic indicators continued to remain positive in the second quarter of 2019. The Industrial Production Index remained at 109.6 as of June 2019, and the unemployment rate tightened marginally to 3.7% in June from 3.8% as of March 2019. Financial indicators such as the distress ratio and the speculative-grade composite spread have both contracted. However, risk remains, as the slope of the yield curve inverted for the first time since the last economic downturn in March and has remained inverted to its current level of 0.15 as of June 30. Although the CBOE Volatility Index (VIX) widened by the end of the second quarter to 15.1%, it has declined to 12.7% as of July 15, 2019. The ratio of issuers rated 'B-' or below to total speculative-grade issuers has been rising gradually, to 19.1% by the end of second quarter from 17.7% in the previous quarter, opening gap for probabilities of default. In addition, the downgrade ratio (the share of rating actions that were downgrades) and U.S. corporate defaults each rose to their highest quarterly levels since 2016 at 67%.

Overall, the U.S. speculative-grade default rate tightened to 2.3% as of May 31, 2019, but the U.S. default tally rose to its highest level since the second quarter of 2017. With this uptick in defaults, S&P Global Ratings Research expects the U.S. trailing-12-month speculative-grade corporate default rate to reach 2.7% by March 2020, up from 2.1% as of March 2019 2018. Following the 2008 recession, the U.S. speculative-grade default rate bottomed out at 1.96% in September 2011, and then it eventually hit its apex of 5% at the beginning of 2017 before dropping to 2.3% as of May 31, 2019.

Chart 5

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Chart 6

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Chart 7

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Table 2

Seven Sectors Experienced Drops In Distressed Credits In May; As A Result, The Overall Distress Ratio Is Down To 6.2%
Number of distresssed issues Distress ratio* (%) Distribution of distressed credits (%) Total debt affected (Mil. $) Difference in % of distressed credits (month-over-month) Debt-based distress ratio (%) % change of distressed credits by sector
Capital goods 3 5.1 2.7 1,240.0 0.2 4.3 0.0
Consumer products 6 5.0 5.5 3,725.0 (1.2) 5.6 (25.0)
Financial institutions 5 3.6 4.5 1,506.0 (3.0) 4.4 (44.4)
Forest products and building materials 4 6.9 3.6 1,025.0 1.1 4.6 33.3
Health care 5 5.1 4.5 6,656.0 (0.5) 8.3 (16.7)
High technology 2 1.7 1.8 767.0 0.2 1.0 0.0
Homebuilders/real estate cos. 4 5.7 3.6 1,020.0 (0.5) 4.0 (20.0)
Insurance 3 7.7 2.7 781.0 (0.6) 3.7 (25.0)
Media and entertainment 5 2.1 4.5 3,204.0 1.2 2.2 25.0
Metals, mining, and steel 2 3.4 1.8 875.0 0.2 2.9 0.0
Oil and gas 33 18.4 30.0 14,850.0 0.0 17.4 (8.3)
Retail/restaurants 14 16.7 12.7 5,122.0 1.1 12.4 0.0
Telecommunications 21 14.7 19.1 12,346.0 2.4 10.0 5.0
Transportation 1 2.4 0.9 670.0 (0.8) 3.0 (50.0)
Utilities 2 1.3 1.8 975.0 0.2 1.2 0.0
Total 110 6.2 54,762.0 5.5
*The S&P Global Rating distress ratio is defined as the number of speculative-grade issues with option-adjusted spreads above 1,000 bps to the total number of speculative-grade issues. ¶Outstanding debt amount associated with distressed issues divided by the total debt outstanding of speculative-grade issues. Distribution of distressed credits is defined as the distribution, by sector, within all speculative-grade issues with option-adjusted spreads above 1,000 bps. Data as of July 15, 2019. Source: S&P Global Ratings Research.

Chart 8

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Chart 9

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Chart 10

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Table 3

List Of Distressed Credits By Issuers
Sector/company Issuer ratings are for a related entity Number of issues Outstanding amount (Mil. $) Rating Outlook/CreditWatch
Capital goods
Aptim Corp. 1 515.0 CCC+ Stable
Optimas OE Solutions Inc. Yes 1 225.0 B- Stable
Vertiv Intermediate Holding Corp. Yes 1 500.0 B Negative
Consumer products
Acosta Inc. 1 800.0 CCC Negative
Dean Foods Co. 1 700.0 CCC+ Negative
High Ridge Brands Co. 1 250.0 CCC- Negative
Kronos Acquisition Holdings Inc. 1 890.0 CCC+ Stable
Pyxus International Inc. 1 635.4 CCC+ Negative
Revlon Consumer Products Corp. 1 450.0 CCC+ Negative
Financial institutions
CNG Holdings Inc. 1 310.0 B Stable
Freedom Mortgage Corp. 1 250.0 B- Stable
Navient Corp. 1 300.0 BB- Stable
PHH Mortgage Corp. 1 330.9 B- Negative
Populus Financial Group Inc. 1 315.0 B Stable
Forest products and building materials
Apex Tool Group LLC 1 325.0 B- Stable
Northwest Hardwoods Inc. 2 435.0 CCC Negative
Werner FinCo LP 1 265.0 B Negative
Health care
Air Methods Corp. 1 500.0 B- Stable
CHS/Community Health Systems Inc. Yes 3 5755.9 CCC+ Negative
Quorum Health Corp. 1 400.0 CCC Negative
High technology
Pitney Bowes Inc. 1 375.0 BB+ Negative
Riverbed Technology Inc. 1 392.4 B- Negative
Homebuilders/real estate cos.
K. Hovnanian Enterprises Inc. Yes 4 1020.0 CCC+ Negative
Insurance
One Call Corp. 1 228.0 CCC Negative
The Nassau Cos. of New York 1 252.8 B Negative
Unum Group 1 300.0 BBB Stable
Media and entertainment
APX Group Inc. Yes 2 854.3 B- Stable
Exela Intermediate Co. LLC Yes 1 1000.0 B- Negative
Harland Clarke Holdings Corp. 1 800.0 B- Stable
Realogy Group LLC 1 550.0 BB- Negative
Metals, mining, and steel
Foresight Energy Finance Corp. Yes 1 425.0 CCC+ Negative
Hi-Crush Partners LP 1 450.0 B- Positive
Oil and gas
Alta Mesa Holdings L.P. 1 500.0 CCC- Negative
Basic Energy Services Inc. 1 300.0 B- Negative
Bruin E&P Partners LLC 1 600.0 B Stable
Calfrac Holdings LP Yes 1 650.0 B- Stable
California Resources Corp. 2 244.0 CCC+ Negative
Chaparral Energy Inc. 1 300.0 CCC+ Negative
Comstock Resources Inc. 1 849.9 B Stable
Covey Park Finance Corp. Yes 1 600.0 B Stable
Denbury Resources Inc. 6 1368.4 CCC+ Negative
Eclipse Resources Corp. 1 510.5 B- Stable
EP Energy LLC 5 3112.0 CCC- Negative
Great Western Finance Corp. Yes 1 300.0 B- Stable
Halcon Resources Corp. 1 623.9 CC Negative
Jonah Energy LLC 1 600.0 CCC+ Negative
Lonestar Resources America Inc. 1 250.0 B- Stable
Pioneer Energy Services Corp. 1 300.0 CCC+ Negative
Rowan Cos. Inc. 1 360.8 B- Negative
Sanchez Energy Corp. 2 1550.0 CCC Negative
Tapstone Energy LLC 1 300.0 CCC+ Negative
Unit Corp. 1 650.0 B+ Stable
Vine Oil & Gas LP 2 880.0 B Stable
Retail/restaurants
Beverages & More Inc. 1 190.0 CCC+ Negative
Guitar Center Inc. 1 311.0 CCC+ Negative
J.C. Penney Co. Inc. 3 822.3 CCC+ Negative
J.C. Penney Corp. Inc. 2 788.3 CCC+ Negative
Neiman Marcus Group LTD LLC 5 1915.6 CCC Negative
Rite Aid Corp. 1 295.0 B- Negative
The Fresh Market 1 800.0 CCC Negative
Telecommunications
Frontier Communications Corp. 17 10725.6 CCC Negative
GTT Communications Inc. 1 575.0 B- Stable
HC2 Holdings Inc. 1 470.0 B- Stable
United States Cellular Corp. 2 575.0 BB Stable
Transportation
Navios Acquisition Finance (US) Inc. 1 670.0 B- Stable
Utilities
Ferrellgas Finance Corp. Yes 2 975.0 CCC Negative
*Issuer rating used is of a related entity. Data as of July 15, 2019. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.

Related Research

  • Few Corporate Defaults In 2018, But Pockets Of Distress Have Since Emerged, Jul 23, 2019Few Corporate Defaults In 2018, But Pockets Of Distress Have Since Emerged, July 23, 2019
  • U.S. Corporate Defaults Have Spiked This Year, July 18, 2019
  • For The U.S. Expansion, Are Trade Troubles "Just A Flesh Wound"? June 25, 2019
  • U.S. Biweekly Economic Roundup: The Fed Loses "Patience", June 22, 2019
  • With Some Lingering Risks, The U.S. Speculative-Grade Corporate Default Rate Is Set To Rise To 2.7% By March 2020, June 3, 2019

This report does not constitute a rating action.

Credit Markets Research:Nicole Serino, Primary Credit Analyst, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Sudeep K Kesh, Secondary Credit Analyst, New York (1) 212-438-7982;
sudeep.kesh@spglobal.com

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