(Editor's Note: In response to investors' sharp focus on U.S. and Canadian 'CCC' rated nonfinancial and financial corporate issuers, as well as their first cousins rated 'B-', S&P Global Ratings launched the "Risky Credits" series in April 2020. It is published monthly to provide insight on credit trends and potential risks affecting 'B-' and 'CCC' rated corporate issuers. Because the majority of defaults are from companies rated in the 'CCC' category [with the exception of distressed exchanges, which are less easily spotted several quarters in advance], 'CCC' and 'B-' rated companies with negative outlooks or ratings on CreditWatch negative are even more important to monitor in this unprecedented downturn and uncertain recovery. On June 29, 2020, we corrected this article to reflect that the number of 'CCC' category rated corporate issuers, as opposed to just 'CCC+' rated corporate issuers, has nearly doubled since February.)
- The number of corporate issuers in the 'CCC' rating category in the U.S. and Canada has nearly doubled (to 256 from 132) since the beginning of February 2020, when the COVID-19 pandemic and rapid deterioration in oil prices began.
- The percentage of companies downgraded to the 'CCC' rating category from 'B-' decreased in May to 3.1%, but the three-month average remains at an all-time high of 10.3%.
- The U.S. speculative-grade composite spread narrowed by over 14% in May, continuing its path to normalcy since reaching a high of 1,046 basis points in late March.
- The U.S. speculative-grade 12-month trailing default rate increased to 4.7% as of May 31, 2020. There were 26 defaults globally in the month among companies previously rated in the 'CCC' and 'CC' rating categories (half of which were selective defaults).
On This Month's Front Burner
Negative actions peak: After peaking in late March, the number of negative rating actions both globally and in North America has slowed as S&P Global Ratings has reviewed many of its ratings. The percentage of U.S. and Canadian companies downgraded to the 'CCC' rating category from 'B-' decreased in May to 3.1%, but the three-month average remains at an all-time high of 10.3%, and the number of companies in the 'CCC' rating category has nearly doubled since the beginning of February 2020, when the COVID-19 pandemic and rapid deterioration in oil prices began. Issuers in the 'CCC' category have an unsustainable capital structure and therefore are particularly vulnerable to default; their historical default rates from 1981 through first-quarter 2020 are 11x higher than those in the 'B' category. Now, as social distancing measures aimed at curbing the spread of COVID-19 allow economies to begin reopening, we think the recovery will likely be slow and vary by sector. For more information, see "COVID-19 Impact: Key Takeaways From Our Articles."
Risk across industries varies: Issuers directly affected by social distancing measures have been more exposed to credit deterioration, both within the 'B-' and lower rating categories as well as in general. The media and entertainment sector (largely made up of hotels, gaming, and leisure companies) leads in 'B-' rated issuers as the sector feels the compounding effects of a relatively weak ratings profile before the pandemic and a substantive decline in revenue for many issuers due to COVID-19-related travel restrictions and the need to tap markets--therefore increasing leverage--to help survive the temporary dislocation. The sector also experienced an increase in negative bias (the proportion of issuers with negative outlooks or ratings on CreditWatch negative) since April.
Spreads narrow: The U.S. speculative-grade composite spread narrowed by over 14% in May, continuing its path to normalcy since reaching a high of 1,046 basis points (bps) in late March. Nevertheless, spreads remain elevated at 646 bps currently, compared with 449 bps at the beginning of 2020, reflecting continued risk aversion for speculative-grade issuers most deeply affected by COVID-19-related rating actions, oil dislocations, and elevated business, financial, and default risks. Despite elevated spreads compared with the beginning of the year, speculative-grade issuance is expected to hit record levels in June, while loan volumes are expected to lag.
For the lowest ratings, default risk is high: There were 26 global corporate defaults in May, 15 of which were U.S.-based, and each defaulter was previously rated in the 'CCC' or 'CC' rating category. Half were selective defaults. The U.S. default rate picked up to 4.7% as of May 31, 2020, and we expect it to keep climbing given challenging credit and financing conditions.
Bankruptcy defaults rise: The percentage of defaulting issuers that filed for Chapter 11 increased in May to 27%, compared with 20% in the previous month, as companies directly affected by COVID-19 began to resort to bankruptcy as a way to solvency, in the absence of meaningful risk appetite among investors for primary lending at palatable rates.
The loan default rate rises: According to S&P Global Market Intelligence's Leveraged Commentary & Data, the U.S. leveraged loan default rate rose in May 2020 to 3.2%, compared with only 1% in May 2019.
CLO collateral actions: Since early March, we have downgraded or placed on CreditWatch negative just under 30% of collateral for U.S. broadly syndicated loan collateralized loan obligations (CLOs) (in comparison, about 40% of U.S. and Canadian corporate and sovereign issuer ratings have been affected by COVID-19 and oil prices). The 'CCC' buckets are now just under 12%, and 437 tranches across 317 CLO transactions are currently on CreditWatch negative.
|Top Rating Changes To 'CCC' From 'B-' By Debt Amount (Year To Date)|
|Rating date||Issuer||Country||Sector||Rating to||Rating from||Debt amount (mil. US$)|
|Canada||Aerospace and defense||CCC+||B-||9,287|
First Quantum Minerals Ltd.
|Canada||Metals, mining, and steel||CCC+||B-||6,000|
Hertz Global Holdings Inc.
GTT Communications Inc.
Advantage Solutions Inc.
Varsity Brands Holding Co. Inc.
|Canada||Media and entertainment||CCC-||B-||2,745|
SM Energy Co.
|U.S.||Oil and gas exploration and production||CC||B-||2,300|
Aveanna Healthcare LLC
FXI Holdings Inc.
|U.S.||Chemicals, packaging, and environmental services||CCC+||B-||2,075|
Helix Acquisition Holdings Inc.
Life Time Inc.
|U.S.||Media and entertainment||CCC+||B-||1,984|
AVSC Holding Corp.
|U.S.||Media and entertainment||CCC||B-||1,980|
Syniverse Holdings Inc.
Callon Petroleum Co.
|U.S.||Oil and gas exploration and production||CC||B-||1,900|
Mohegan Tribal Gaming Authority
|U.S.||Media and entertainment||CCC+||B-||1,876|
Flexential Intermediate Corp.
LTI Holdings Inc.
|Data as of June 15, 2020. Source: S&P Global Ratings.|
- U.S. CLO Exposure To Negative Corporate Rating Actions (As Of June 14, 2020), June 16, 2020
- Historically Low Ratings In The Run-Up To 2020 Increase Vulnerability To The COVID-19 Crisis, May 28, 2020
- Risky Credits: Hanging On The Edge, May 26, 2020
- Transportation Leads Distress Ratios As Demand Collapses Across U.S. Sectors, May 26, 2020
- More Than One-Quarter Of Speculative-Grade Issuers Are Weakest Links, May 14, 2020
- U.S. Biweekly Economic Roundup: With Unprecedented Job Losses, Unemployment Soars, May 8, 2020
- U.S. Leveraged Finance Q1 2020 Update: Recovery Ratings Face Limited COVID-19 Disruption, April 23, 2020
- Rising Credit Pressures Amid Deeper Recession, Uncertain Recovery Path, April 22, 2020
- U.S. Corporate Credit Stress Surges To Recession Levels On COVID-19 And Oil Shocks, April 14, 2020
This report does not constitute a rating action.
|Credit Markets Research:||Nicole Serino, New York + 1 (212) 438 1396;|
|Leveraged Finance:||Robert E Schulz, CFA, New York (1) 212-438-7808;|
|Secondary Contacts:||Sudeep K Kesh, New York (1) 212-438-7982;|
|Ramki Muthukrishnan, New York (1) 212-438-1384;|
|Research Contributors:||Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Sundaram Iyer, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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