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In This List

Credit Trends: Risky Credits: The Drop-Off To The 'CCC' Rating Category From 'B-' Still Looms Large


Default, Transition, and Recovery: Global Corporate Defaults Continue To Rise, To 194 So Far In 2020


COVID-19 Impact: Key Takeaways From Our Articles


Credit Trends: Downgrade Potential Eases But Remains Above Pre-Pandemic Levels


Default, Transition, and Recovery: Distressed Exchanges Boost Corporate Defaults In The Second Half Of 2020

Credit Trends: Risky Credits: The Drop-Off To The 'CCC' Rating Category From 'B-' Still Looms Large

(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.)


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.

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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$)

Bombardier Inc.

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.

U.S. Transportation CCC- B- 5,050

GTT Communications Inc.

U.S. Telecommunications CCC+ B- 3,415

Advantage Solutions Inc.

U.S. Consumer products CCC+ B- 3,345

Varsity Brands Holding Co. Inc.

U.S. Consumer products CCC+ B- 2,800

CDS Group

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

U.S. Health care CCC+ B- 2,091

FXI Holdings Inc.

U.S. Chemicals, packaging, and environmental services CCC+ B- 2,075

Helix Acquisition Holdings Inc.

U.S. Capital goods CCC+ B- 2,055

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.

U.S. Telecommunications CCC+ B- 1,922

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.

U.S. Telecommunications CCC+ B- 1,760

LTI Holdings Inc.

U.S. Capital goods CCC+ B- 1,740
Data as of June 15, 2020. Source: S&P Global Ratings.

Related Research

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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