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Credit Trends: Risky Credits: 'CCC' Category Ratings Remain Nearly Double Pre-Pandemic Levels

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Credit Trends: U.S. Corporate Rating Actions Show Post-COVID-19 Credit Recovery Has Begun

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Credit Trends: Risky Credits: 'CCC' Category Ratings Remain Nearly Double Pre-Pandemic Levels

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On This Month's Front Burner

Number of 'CCC' category ratings has about doubled since before the pandemic:  Although the number of risky credits has decreased since our last report, issuers in the 'CCC' rating category total 242--nearly double the 134 as of December 2019. Media and entertainment has experienced the most downgrades since the beginning of the crisis, and the sector remains highly vulnerable to default as the number of issuers rated 'B-' and below is still rising, despite easing market pressures (see "The Travel And Entertainment Business Faces Elevated Default Risk Despite Easing Market Pressures," Oct. 7, 2020).

Transitions to 'CCC' slow:  Downgrades into the 'CCC' category from 'B-' slowed in September. Only 0.6% of 'B-' rated issuers transitioned to the 'CCC' rating category--the lowest monthly amount since October 2018. Downgrades from 'B' to 'B-' have increased slightly, as 1.1% of 'B' rated issuers were downgraded to 'B-'.

Spreads tighten in the 'CCC' category:  Both the U.S. 'B' composite spread and the 'CCC' composite spread tightened since Sept. 1 to 602 basis points (bps) and 988 bps, respectively, as investors' search for yield intensifies and tolerance for risky credit increases. The U.S. distress ratio (the proportion of speculative-grade issues with option-adjusted composite spreads of more than 1,000 bps relative to U.S. Treasuries) has continued to decline, to 9.5% as of Sept. 17, 2020, from its peak in March 2020 (see "One-Third Of U.S. Distressed Issuers Have Faced Downgrades Or Default Since March," Oct. 8, 2020).

Defaults are elevated but below second-quarter levels:  There were eight U.S. and Canada defaults in September, slightly lower than the August count of 10 and well below the average monthly default count of 20 in the second quarter. Out of eight defaults in September, six were rated in the 'CCC' and lower rating categories, illustrating the high default risk associated with this part of the ratings spectrum. Six companies rated in these categories have defaulted in October (through Oct. 28). However, as spreads continue to tighten, issuers have more headroom for refinancing, even for lower-rated issuers, which may curb--though not stop--a rise in defaults.

Bids recover:  The average bid of 'B' rated loans increased marginally to 96.27 as of Oct. 9, 2020, which is slightly higher than its value of 96.16 as of Oct. 9, 2019. The same for 'CCC' rated loans has also increased slightly, to 81.70 as of Oct. 9, 2020, which is higher than its value of 78.77 at this point of time in 2019.

Speculative-grade issuance is up:  The year-to-date speculative grade issuance in 2020 is nearly 60% higher than in October 2019 (see chart 4). Issuance increased the most for 'BB-' ratings, to US$72.71 billion as of Sept. 30, 2020, versus US$32.61 billion at the same time in 2019.

Round trips from 'CCC+' to 'B-' remain limited:  Since June, there have been a handful of upgrades from 'CCC+' to 'B-', as some companies outperform our expectations (see chart 11).

Slower CLO collateral actions lead to CLO CreditWatch resolutions:   There were a number of U.S. collateralized loan obligation (CLO) rating actions in the third quarter. Our COVID-19-related U.S. CLO rating actions through early September have affected a total of 351 U.S. CLO transactions. The rating actions were: 129 ratings affirmed and removed from CreditWatch with negative implications, 473 downgrades (including three ratings lowered to 'CC (sf)' from junior notes of amortizing CLO 2.0s), seven CreditWatch negative placements, and four upgrades. (For more, see "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.)

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Chart 11

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Top 20 Rating Changes To 'CCC' Category From 'B-' By Debt Amount (Year To Date)
Rating date Issuer Country Sector Rating to Rating from Debt amount (mil. US$)
4/15/2020

Finastra Ltd.

Cayman Islands High technology CCC+ B- 36,029
3/24/2020

Bombardier Inc.

Canada Aerospace and defense CCC+ B- 9,287
4/17/2020

First Quantum Minerals Ltd

Canada Metals, mining, and steel CCC+ B- 6,000
7/21/2020

Clear Channel Outdoor Holdings Inc.

U.S. Media and entertainment CCC+ B- 5,835
4/27/2020

Hertz Global Holdings Inc.

U.S. Transportation CCC- B- 5,050
5/14/2020

Nabors Industries Ltd.

Bermuda Oil and gas exploration and production CCC+ B- 3,725
4/10/2020

GTT Communications, Inc.

U.S. Telecommunications CCC+ B- 3,415
4/8/2020

Advantage Solutions Inc.

U.S. Consumer products CCC+ B- 3,345
4/8/2020

Varsity Brands Holding Co Inc.

U.S. Consumer products CCC+ B- 2,800
3/27/2020

CDS Group

Canada Media and entertainment CCC- B- 2,745
9/4/2020

Cengage Learning Holdings II Inc.

U.S. Media and entertainment CCC+ B- 2,580
4/30/2020

SM Energy Co.

U.S. Oil and gas exploration and production CC B- 2,300
9/4/2020

McGraw-Hill Education, Inc.

U.S. Media and entertainment CCC+ B- 2,125
1/3/2020

Aveanna Healthcare LLC (Aveanna Healthcare Holdings Inc.)

U.S. Health care CCC+ B- 2,091
8/19/2020

Wesco Aircraft Holdings Inc. (Wolverine Intermediate Holding Corp.)

U.S. Aerospace and defense CCC+ B- 2,075
4/23/2020

FXI Holdings, Inc.

U.S. Chemicals, packaging, and environmental services CCC+ B- 2,075
4/8/2020

Helix Acquisition Holdings, Inc.

U.S. Capital goods CCC+ B- 2,055
4/17/2020

Life Time, Inc.

U.S. Media and entertainment CCC+ B- 1,984
6/12/2020

AVSC Holding Corp.

U.S. Media and entertainment CCC B- 1,980
4/23/2020

Syniverse Holdings, Inc.

U.S. Telecommunications CCC+ B- 1,922
Source: S&P Global Ratings. Data as of Sept. 30, 2020.

This report does not constitute a rating action.

Credit Markets Research:Nicole Serino, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Sudeep K Kesh, New York (1) 212-438-7982;
sudeep.kesh@spglobal.com
Leveraged Finance:Robert E Schulz, CFA, New York (1) 212-438-7808;
robert.schulz@spglobal.com
Ramki Muthukrishnan, New York (1) 212-438-1384;
ramki.muthukrishnan@spglobal.com
Research Contributor:Shripati Pranshu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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