(Editor's Note: Our monthly "Risky Credits" report will not be published in December but will return in January 2021. This 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 or lower ratings on U.S. and Canadian companies decreased to 237, its lowest since March, as of Oct. 31, 2020, as market conditions continued to improve across the region.
- As U.S. 'B' and 'CCC' composite spreads continued to tighten in October, to 586 basis points and 949 basis points, respectively, issuers at the lower end of the speculative-grade scale continued to borrow and increase leverage.
- U.S. and Canadian defaults remained high in October at 10, up from eight in September.
On This Month's Front Burner
Walking on thin ice: Although the total number of U.S. and Canadian corporate issuers rated in the 'CCC' category or lower by S&P Global Ratings decreased to 237 as of Oct. 31--its lowest since March--it is substantially higher than pre-pandemic totals. The pandemic has intensified the U.S. economy's heavy reliance on debt, a long-term trend resulting from low borrowing costs. As investors' risk-on approach continues, lower-rated companies continue to build leverage and reduce coverage ratios, as reflected by steady declines in metrics such as EBITDA to interest. This could prove problematic for lower-rated issuers if credit conditions once again tighten (see "U.S. Leveraged Finance Q3 2020 Update: Pandemic-Induced Borrowing Dilutes Recovery Prospects And Lessens Interest Coverage," Nov. 2, 2020).
Defaults keep a steady pace: The number of defaults in the region rose to 10 in October from eight in the previous month, led by oil and gas defaults with three, followed by consumer products and the media and entertainment sector with two each. Distressed exchanges have dominated defaults since Aug. 1, 2020, at 50% of total defaults. We expect the U.S. trailing-12-month speculative-grade corporate default rate to rise to 9% by September 2021 from 6.3% in September 2020 (see "The U.S. Speculative-Grade Corporate Default Rate Could Rise To 9% By September 2021," Nov. 23, 2020).
Transitioning to 'CCC': Transition rates to the 'CCC' category from 'B-' have continued to decrease, to 0.5% in October 2020 from 0.6% in September, while transitions to 'B-' from 'B' increased slightly, to 1.7% from 1.1%.
Market conditions continue to improve: U.S. 'CCC' and 'B' composite spreads showed continued improvement in October 2020, tightening to 949 basis points (bps) and 586 bps, respectively. Meanwhile, speculative-grade (rated 'BB+' or lower) issuance in 2020 is about 58% higher than at this point in 2019, as an increase in investors' risk appetite has allowed for even the lowest-rated issuers to pay down short-term debt. Total year-to-date issuance stands at $292.3 billion in 2020, compared with $185.2 billion in 2019 to date (as of Oct. 31) (see "Global Financing Conditions: Bond Issuance Is Expected To Finish 2020 Up 16% And Decline In 2021," Oct. 26, 2020).
Pockets of upgrades: For the first time this year, in September and October the number of issuers upgraded to 'B-' from 'CCC+' or lower leveled out with the number of issuers downgraded to 'CCC+' or lower. However, the number of issuers rated 'CCC+' or lower still remains 50% higher than in 2019, suggesting that excess liquidity and low interest rates are only postponing the inevitable for some lower-rated speculative-grade issuers in the riskiest sectors.
Bids steady: The average bid of 'B' rated loans has dropped marginally since our last report, to 96.2 as of Nov. 5, 2020, which is slightly higher than 95.8 as of Nov. 5, 2019. Meanwhile, the average bid for 'CCC' rated loans has increased by 0.52 bp to 82.2 as of Nov. 5, still higher than 78.9 at this point in 2019.
CLO collateral actions: The overall credit quality of U.S. collateralized loan obligation (CLO) portfolios continues to stabilize following the spike in corporate downgrades this past spring and summer. The proportion of CLO assets on CreditWatch with negative implications has declined to below 2%, a level not seen since the COVID-19 pandemic began. However, the proportion of CLO assets with negative outlooks remains roughly double the pre-pandemic total (see "Some O/Cs Recover As Junior Note PIK Balances Get Repaid," Oct. 30, 2020).
|Top 20 Rating Changes To 'CCC+' Or Lower From 'B-' By Debt Amount (YTD)|
|Rating date||Issuer||Country||Sector||Rating to||Rating from||Debt amount (mil. US$)|
|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|
Cengage Learning Holdings II Inc.
|U.S.||Media and entertainment||CCC+||B-||2,580|
SM Energy Co.
|U.S.||Oil and gas exploration and production||CC||B-||2,300|
McGraw-Hill Education Inc.
|U.S.||Media and entertainment||CCC+||B-||2,125|
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.
|Data as of Oct. 31, 2020. Source: S&P Global Ratings.|
- COVID-19 Impact: Key Takeaways From Our Articles, Nov. 25, 2020
- U.S. Leveraged Finance Q3 2020 Update: Pandemic-Induced Borrowing Dilutes Recovery Prospects And Lessens Interest Coverage, Nov. 2, 2020
- Global Financing Conditions: Bond Issuance Is Expected To Finish 2020 Up 16% And Decline In 2021, Oct. 26, 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:||Shripati Pranshu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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