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When The Credit Cycle Turns: Spotlight On Recovery Prospects For The U.S. Consumer Products' Sector

S&P Global Ratings believes defaults in the consumer space are likely to increase because secular pressures have led to a preponderance of weakest link issuers (see table 1).

Here, we compare the consumer products sector with all corporates for default risk and recovery prospects following a payment default. We also explain our approach to recovery analysis for the sector and how we differentiate between various subsectors.

We define the U.S. consumer products sector as companies we rate using the consumer products key credit factors (see "Key Credit Factors For The Branded Nondurables Industry," May 7, 2015; "Key Credit Factors For The Consumer Durables Industry," Dec. 12, 2013; and "Key Credit Factors For The Business And Consumer Services Industry," Nov. 19, 2013.)

Table 1

Consumer Products By The Numbers
Consumer products sector's rank among weakest links No. 1
% of loan volume in sector among weakest links 25%
Number of credits among weakest links year over year change +63%
Number of credits at the low end of range ('CCC' and 'CCC-') year over year change +120%
Biggest reason for downgrades in weakest link category Secular change

As of the end of October 2019, the consumer products sector was among the weakest of all corporate sectors, with the largest number of weakest link issuers (rated 'B-' or lower by S&P Global Ratings with negative outlooks or ratings on CreditWatch with negative implications; see charts 1 and 2). Just over one-third of consumer product ratings are weakest link issuers, and those issuers continue migrating lower. The migration to the low end of the range is primarily attributable to downgrades to 'CCC' from 'CCC+' within the past 12 months, meaning we see a default as increasingly likely for those credits over the coming 12 months. Although the consumer products sector represents only 5.5% of total leveraged loans outstanding rated by S&P Global Ratings, it comprises 19% of North American weakest link loan volume. We believe this trend will continue given the significant degree of secular change occurring in the sector. In fact, the biggest reason for downgrades into the weakest link category is secular change, as companies face a changing retail landscape and different consumer behavior. Many traditional retailers, which consumer product companies rely on for the bulk of their sales, are struggling, particularly in the face of online sales competition but also from new entrants in the discount channel. Changes to the sector's distribution channels are eroding the competitive strength of several companies, particularly those that have weaker brands and a high degree of customer concentration or that depend on outsourcing by retailers or consumer products companies.

Chart 1


Chart 2


Consumer Products Has The Highest Number Of Weakest Links

At over 25%, consumer products' aggregate loan exposure in the weakest link category leads all sectors, tying oil and gas sector and exceeding the restaurant and retailing sector, both of which have long been battling secular headwinds (see chart 3).

Consumer products also has the highest proportion of weakest links to outstanding loan volume of any corporate sector. Several large loan issuers (see table 4) contribute to the heavy weighting of the sector, with the top five representing 40% of the sector's weakest link loan volume (see chart 4).

Chart 3


Chart 4


Changing tastes are also leaving companies with products that no longer resonate with consumers, particularly in younger demographics (see chart 5). In addition, several smaller companies have purchased mature brands from larger companies and been unable to expand them. Not surprisingly, the second-largest factor behind the heightened level of distress is poor returns on capital expenditure programs because company investments in growth strategies haven't played out as planned. The impact of these changes has been most pronounced for the apparel sector, where fashion risk is eternally heightened, but several food companies are also finding it difficult to successfully invest and execute growth strategies when their core products are no longer resonating with the consumer or are losing share to companies with more resources to adapt to the changing competitive landscape. On the other side of the ledger, trade tariffs, which have been more disruptive for other sectors like auto and transportation, have only a limited impact on consumer products, with the exception being small consumer durable companies that have not been able to raise prices fast enough to offset the impact of the tariffs.

Food and kindred products and the textile and apparel subsectors exhibit the highest level of stress, each representing 17% of the sector's weakest links (see chart 6).

Chart 5


Chart 6


Leverage Is Rising

Contributing to the degradation in credit quality has been a significant increase in leverage. Year-end median leverage increased by 30%, to 5.6x in 2018 from 4.3x in 2015 (see chart 7). The increase in leverage is primarily attributable to eroding EBITDA. We estimate that about half of the EBITDA decline was due to rising costs (freight, tariffs, input, and acquisition-related costs) and idiosyncratic execution issues. The remainder was primarily attributable to secular changes. In addition, two large companies sold assets--Newell Brands Inc. and Spectrum Brands Inc.

Chart 7


Secured First-Lien Recovery Rating Distribution

In terms of recent issuance, recovery ratings in consumer products compare favorably with corporates as a whole (see charts 8 and 9). In consumer products, over 40% of new issuance had recovery ratings of '1' and '2', compared with about 35% for all corporates. The main reason is that consumer products companies had more '2' recovery ratings and fewer '3' recovery ratings than corporates as a whole.

Chart 8


Chart 9


Recovery Prospects In Consumer Products Vary Widely

Capital structure composition is an additional factor affecting first-lien recovery prospects. Under the same leverage, recovery across the capital structure is a zero-sum game. First-lien recoveries are typically higher when they benefit from sizable junior debt cushions. Conversely, companies capitalized primarily with unsecured debt will typically have higher unsecured recovery prospects given the relatively small size of secured tranches ahead of them in the capital structure. This is the case for agribusiness companies, which have a relatively low mix of first-lien debt in their capital structures. That in part has to do with working capital lenders securing a first priority position on companies' highly liquid inventories and typically high quality receivables, with issuers opting to raise unsecured debt for the rest of their debt financing mix. We estimate that about two-thirds of speculative grade issuers have unsecured heavy capital structures and about half of those issuers are in the 'BB' category for which unsecured lenders could still be displaced by a future issuance of priority ranking debt if their credit quality were to deteriorate.

Although estimated average first-lien recovery prospects for the consumer products sector are comparable with the corporate universe in aggregate, it is worth noting that recoveries vary widely across subsectors (see chart 10). Subsectors that are more likely to have branded portfolios, like packaged food and personal care, have better first-lien recovery prospects than more commodity-based or cyclical subsectors like tobacco, consumer services, or commodity foods. In fact, emergence valuation multiples are highest for the personal care and package foods subsectors, reflecting the stronger brand value (see table 2). By contrast, the more cyclical consumer durable and services issuers and the more volatile commodity foods sectors have lower emergence multiples.

Actual default experience over the past 10 years shows that first-lien recoveries in consumer products, at an average of 76%, fared slightly worse than overall corporates, at 80% (see table 3).

Chart 10


Table 2

Consumer Products' Average Emergence Valuation Multiples*
Subsector Company count Average of multiple Minimum of multiple Maximum of multiple
Agribusiness 4 5.4 5.0 6.0
Appliances 1 6.0 6.0 6.0
Beverages 3 5.7 5.0 6.0
Food and kindred products 14 5.6 5.0 6.5
Home furnishings 4 5.5 5.0 6.0
Miscellaneous consumer products 39 5.6 5.0 6.5
Packaged and branded food 18 5.8 5.0 7.0
Personal care and household products 16 5.8 5.0 7.0
Textile and apparel 18 5.7 5.0 6.5
Tobacco 1 5.0 5.0 5.0
Consumer products total 118 5.7 5.0 7.0
All corporate 1,474 5.6 4.0 7.5
*Data sample consists of nonfinancial corporate borrowers outstanding as of Nov 15, 2019, in the U.S. and Canada, on which a recovery rating was newly assigned or re-reviewed since 2017.

Table 3

Recent Consumer Products Sector Recoveries
Company Priority First lien Second/third lien Unsecured Subordinated Emergence date

CTI Foods Holding Co. LLC

100% 56% 3% N/A N/A 05/03/19

Premier Brands Group Holdings LLC (Nine West)

100% 100% N/A N/A 92% 03/20/19

American Apparel Inc.

N/A 48% N/A N/A 1% 12/14/18

Gibson Brands Inc.

100% 53% N/A N/A 21% 11/01/18

Boardriders Inc. (formerly Quiksilver Inc.)

100% 17% N/A N/A 100% 02/11/16
American Apparel Inc. 100% 38% N/A N/A 100% 02/05/16

The Oneida Group Inc. (formerly known as EveryWare Global Inc.)

100% 44% N/A N/A N/A 06/02/15

Cengage Learning Holdings II Inc.

N/A 84% 21% N/A 25% 03/31/14

Nebraska Book Co. Inc. (NBC Acquisition)

100% 81% N/A 3% 0% 06/29/12

Reddy Ice Corp.

100% 100% 11% 50% N/A 05/31/12

American Safety Razor Co.

N/A 100% 33% N/A N/A 06/30/11

MEGA Brands Inc.

N/A 69% N/A 20% N/A 03/30/10

Quality Home Brands Holdings LLC (restructuring)

N/A 100% 26% 4% N/A 01/26/10

Simmons Bedding Co.

N/A 100% 11% 94% 8% 01/20/10

Merisant Worldwide Inc.

N/A 100% N/A 6% 4% 01/08/10

Pilgrim's Pride Corp.

N/A N/A N/A 100% 100% 12/28/09

True Temper Corp.

N/A 100% 37% N/A 0% 12/11/09

EuroFresh Inc.

N/A 100% N/A 6% 0% 11/19/09

Spectrum Brands Inc.

100% 100% N/A N/A 63% 08/28/09

Sleep Innovations Inc.

N/A 45% 2% N/A N/A 03/05/09
Consumer products total/average 100% 76% 18% 35% 39%
Corporates total/average 97% 80% 30% 29% 14%
N/A--Not applicable.

Consumer Products' Weakest Links Cause Greater Default Risk

Default risk is elevated in the consumer products sector because it is at or near the top of the corporate sectors in the number of weakest link issuers, the percentage of weakest link issuers in the sector, and the aggregate amount of weakest link debt outstanding. These factors contribute to our view that when the credit cycle turns, consumer products will have a higher relative default rate than the aggregate corporate universe. As a result, investors in these loans should focus on their prospects for recovery given defaults for these credits. However, when they do default, we expect their adverse impact on the broader leveraged loan space will be contained because they account for a relatively small share of total outstanding loans.

Table 4

“Weakest Link” Issuers In The Consumer Products Sector
Issuer Current rating Sub-sector S&P Global Ratings rated bank loan (Mil. $)

Advantage Sales & Marketing Inc.

B- Consumer services 3,495

Serta Simmons Bedding LLC

CCC Durables 2,400

Alphabet Holding Co. Inc.

B- Personal care and household products 2,250

Revlon Inc.

CCC+ Personal care and household products 1,800

Kronos Acquisition Holdings Inc.

CCC+ Miscellaneous consumer products 1,400

Varsity Brands Inc.

B- Miscellaneous consumer products 1,400

CSM Bakery Solutions LLC

CCC Packaged and branded food 1,060

Del Monte Foods Inc.

CCC+ Packaged and branded food 970

TMK Hawk Parent Corp.

CCC+ Consumer services 820

Rodan & Fields LLC

CCC+ Personal care and household products 800

Anastasia Parent LLC

B- Personal care and household products 800

Give and Go Prepared Foods Corp.

B- Packaged and branded food 575

Blue Ribbon LLC

B- Beverage 531

Arctic Glacier U.S.A. Inc.

B- Food & kindred products 500

NSA International LLC

B- Food & kindred products 500

Innovative Water Care Global Corp.

B- Miscellaneous consumer products 450

Flavor Holdings Inc.

CCC Tobacco 450

Libbey Glass Inc.

B- Durables 440

PFS Holding Corp.

CCC- Consumer services 390

Knel Acquisition LLC

B- Food & kindred products 380

Winebow Group LLC

CCC+ Beverage 360

P&L Development Holdings LLC

B- Personal care and household products 313


CCC Textile & apparel 307

Iconix Brand Group Inc.

CCC Textile & apparel 300

KNB Holdings Corp.

CCC+ Durables 295

Fetch Holdco LLC

B- Miscellaneous consumer products 294

Badger Finance LLC

CCC Beverage 293

Never Slip Topco Inc.

CCC Textile & apparel 283

Outerstuff LLC

CCC Textile & apparel 255

Indra Holdings Corp.

CCC+ Textile & apparel 245

VIP Cinema Holdings Inc.

CCC- Durables 230

Renfro Corp.

CCC+ Textile & apparel 220

Pyxus International Inc.

CCC+ Tobacco 60

Isagenix Worldwide Inc.

CCC+ Food & kindred products 40

SunOpta Inc.

CCC Food & kindred products 0

Dean Foods Co.

CCC+ Food & kindred products 0
Source: S&P Gllobal Ratings.

Related Criteria

  • Key Credit Factors For The Branded Nondurables Industry, May 7, 2015
  • Key Credit Factors For The Consumer Durables Industry, Dec. 12, 2013
  • Key Credit Factors For The Business And Consumer Services Industry, Nov. 19, 2013

This report does not constitute a rating action.

Primary Credit Analysts:Olen Honeyman, New York (1) 212-438-4031;
Chris Johnson, CFA, New York (1) 212-438-1433;
Secondary Contacts:Hanna Zhang, New York (1) 212-438-8288;
Minni Zhang, New York;
Analytical Manager:Ramki Muthukrishnan, New York (1) 212-438-1384;

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