(Editor's Note: Our "Risky Credits" series focuses on U.S. and Canadian 'CCC' rated corporate issuers, as well as their first cousins rated 'B-'. Because the majority of defaults are from companies rated in the 'CCC' category, these 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.)
- The number of 'CCC' category ratings on U.S. and Canadian companies steadied in August as both the pace of companies entering the rating category and defaults slowed.
- U.S. 'B' and 'CCC' composite spreads continued to tighten in July, by 7% and 2% to 618 and 1,094, respectively, as investors' risk tolerance increased for 'B-' rated debt.
- Through August, 11 companies rated in the 'CCC' and 'CC' rating categories defaulted, and five have defaulted so far in September (as of Sept. 9).
- During the first half of 2020, we downgraded or placed on CreditWatch negative about one-third of the issuers whose loans are held in U.S. broadly syndicated loan collateralized loan obligations.
On This Month's Front Burner
Negative actions slow: Negative rating actions in the U.S. and Canada slowed in August, with only 32, down from 48 in July and 374 in April, when state and local governments imposed stringent social distancing measures across the U.S. and Canada. The majority (69%) of negative rating actions in August were downgrades, and most followed a previous negative rating action since March, such as an outlook revision or CreditWatch placement (see "COVID-19 Impact: Key Takeaways From Our Articles").
Defaults slow: There were 11 defaults in August, down from an average of about 31 defaults per month over the previous four months. All 11 defaults in August were rated in the 'CCC' and lower rating categories, illustrating the high default risk associated with this part of the ratings spectrum. Five companies rated in these categories have defaulted so far in September (as of Sept. 9).
Transitioning to 'CCC': Transitions into the 'CCC' category from 'B-' slowed as well, with only 0.8% of 'B-' rated issuers transitioning into the 'CCC' rating category--the lowest monthly transition pace since October 2018. The number of 'CCC' category ratings on U.S. and Canadian companies steadied in August as both the pace of companies entering the rating category and defaults slowed.
Spreads tighten: U.S. 'B' and 'CCC' composite spreads continued to tighten in July, by 7% and 2% to 618 and 1,094, respectively, as investors' risk aversion toward 'B-' rated debt lessens. As credit spreads continue to trend toward precrisis levels, some 'CCC' rated issuers are even able to access capital markets to counter drastically reduced revenue and bolster liquidity. However, these issuers are most at risk for potential downgrades if financing conditions begin to worsen.
Bids recover: The average bid of 'CCC' rated loans has recovered 30% from its 2020 low, while that of 'B' rated loans has recovered 25%. Those bids are now only 1% and 2% below their levels at the end of June, respectively.
CLO collateral actions: Since the beginning of March, COVID-19 containment measures have caused significant declines in revenue and earnings for many of the corporate loan issuers with loans held in U.S. broadly syndicated loan (BSL) collateralized loan obligations (CLOs). During the first half of 2020, S&P Global Ratings downgraded or placed on CreditWatch negative about one-third of the issuers whose loans are held in U.S. BSL CLOs. Some of these companies came to capital markets to raise debt-financed liquidity to survive though the pandemic; the additional debt and decline in earnings have resulted in leverage increasing by 1.3x on average relative to pre-COVID-19 levels. We have resolved substantially all of our COVID-19-related CreditWatch placements on U.S. CLOs. Future CLO rating actions will be a function of changes to the ratings on U.S. corporate loan issuers and loan defaults.
|Top 20 Rating Changes To The 'CCC' Category From 'B-' By Debt Amount (Year To Date)|
|Rating date||Issuer||Country||Sector||Rating to||Rating from||Debt amount (mil. US$)|
|Cayman Islands||High technology||CCC+||B-||36,029|
|Canada||Aerospace and defense||CCC+||B-||9,287|
First Quantum Minerals Ltd
|Canada||Metals, mining, and steel||CCC+||B-||6,000|
Clear Channel Outdoor Holdings Inc.
|U.S.||Media and entertainment||CCC+||B-||5,835|
Hertz Global Holdings Inc.
Nabors Industries Ltd
|Bermuda||Oil and gas exploration and production||CCC+||B-||3,725|
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 (Aveanna Healthcare Holdings Inc.)
Wesco Aircraft Holdings Inc. (Wolverine Intermediate Holding Corp.)
|U.S.||Aerospace and defense||CCC+||B-||2,075|
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|
|Data as of Aug. 31, 2020. Source: S&P Global Ratings.|
- SF Credit Brief: 'CCC' Bucket Approaches Single Digits As About Three-Fourths Of CLO Tranches On COVID-19-Related CreditWatch Are Resolved, Sept. 4, 2020
- Sector Averages Of Reinvesting U.S. BSL CLO Assets: COVID-19 Caused Significant Deterioration In Second-Quarter 2020, Aug. 31, 2020
- Risky Credits: The 'CCC' Category Remains Large As Market Risks Ease, Aug. 24, 2020
- The Still-High Weakest Links Tally Contracts As Defaults Rise, Aug. 18, 2020
- U.S. Biweekly Economic Roundup: The Jobs Recovery Loses Momentum, Aug. 7, 2020
- A Round-Trip Ticket: Some Companies Downgraded To 'CCC+' Could Be Headed To 'B-' As The Economy Recovers, Aug. 7, 2020
- Credit Conditions North America: Rolling Out The Recovery, June 30, 2020
This report does not constitute a rating action.
|Credit Markets Research:||Nicole Serino, New York + 1 (212) 438 1396;|
|Sudeep K Kesh, New York (1) 212-438-7982;|
|Leveraged Finance:||Robert E Schulz, CFA, New York (1) 212-438-7808;|
|Ramki Muthukrishnan, New York (1) 212-438-1384;|
|Research Contributor:||Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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