- The U.S. distress ratio in December hit its lowest level since 2014, narrowing to 5%--from 7.6% as of Nov. 16--as lower-rated borrowers found ample liquidity.
- Despite the low distress ratio, defaults in the U.S. continue to rise. The U.S. speculative-grade default rate reached 6.6% in December 2020, the highest level since 2010.
- While liquidity eased and spreads tightened, lingering revenue strains and curbed demand plagued many low-rated borrowers, especially in sectors most hurt by COVID-19 and the accompanying macroeconomic pressure.
- Moreover, eight of the 19 sectors still have higher distress ratios than they did at the start of 2020, led by oil and gas, which accounts for one-quarter of the distressed credits with a distress ratio of 16.8%.
The U.S. distress ratio--the proportion of speculative-grade (rated 'BB+' or lower) issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries--continues to narrow, reaching 5% as of Dec. 31, from 7.6% in November and 7.5% in December 2019. The decline in the distress ratio followed the speculative-grade median option-adjusted spread, which dropped to 386 bps as of Dec. 31--below its high of 859 bps in March 2020 but still above its 2019 level.
Distress Ratio Drops As Defaults Continue To Rise
Much of the narrowing in spreads can be attributed to the decrease in market volatility due to Federal Reserve actions, continued stimulus from the U.S. government, and better-than-expected vaccine developments over the past few months. As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects.
The year-end tally of U.S. defaults in 2020 was at its highest since the global financial crisis with 146 defaults. We expect the U.S. trailing-12-month speculative-grade corporate default rate to rise to 9% by September 2021--from the current 6.6%--as the number of defaults maintains its rapid pace, largely due to an uptick in distressed exchanges, a trend that has continued into 2021 (see "Global Corporate Default Tally Remains At Four," Jan. 22, 2021).
Sector Dynamics Have Changed Since Last Year
Although many sectors' distress ratios have fallen below January 2020 levels, continued strain on revenue streams and lack of market access have kept eight sectors' distress ratios above pre-pandemic levels (see chart 2). These include media and entertainment, metals and mining, and midstream, which have been derailed by the COVID-19 pandemic and its economic effects.
|62% Of The Total Affected Debt Is In Oil And Gas, Media And Entertainment, And Utility|
|Distress ratio (%)*||Debt-based distress ratio (%)||Number of distressed issues||Total debt affected (mil. $)||Percent change in distressed credits by sector|
|Aerospace and defense||2.9||1.9||1||525||(80)|
|Banks and brokers|
|Chemicals, packaging, and environmental services||1.8||2.3||2||1380||100.0|
|Forest products and building materials|
|Homebuilders/real estate companies||5.6||3.5||5||1220||25.0|
|Media and entertainment||6||4.6||18||9051||(25)|
|Metals, mining, and steel||8.1||6||5||1835||-28.6|
|Oil and gas||16.8||13.8||33||13242||-19.5|
|Data as of Dec. 31, 2020. *S&P Global distress ratio is defined as the number of speculative-grade issues with option-adjusted spreads above 1,000 basis points to the total number of speculative-grade issues. The distress ratio indicates the level of risk the market has priced into bonds. A rising distress ratio reflects an increased need for capital and often precedes increased defaults when accompanied by a severe and sustained market disruption. Source: S&P Global Ratings Research.|
|Credit Stats For The Top Three Distressed Sectors (%)|
|Current negative bias*||Long-term average of negative bias*||Proportion of 'B-' and below new issues (trailing three years)§||Proportion of 'B-' and below outstanding issuer ratings†|
|Oil and gas||62.7||21.0||0||0.6|
|Metals, mining, and steel||39.6||25.5||0||0.3|
|Data as of Dec. 31, 2020. *Negative bias is calculated as the number of U.S. issuers with either a negative outlook or on CreditWatch negative, divided by the total number of U.S. issuers with either positive, negative, or stable (outlook or CreditWatch) implications. The long-term average is taken from 1995 to the present. §The proportion of 'B-' and lower issues is measured relative to the total number of speculative-grade issues. The statistic is calculated for instruments issued in the U.S. during the trailing three years. †The proportion of 'B-' and lower U.S. issuers is measured relative to the total number of U.S. speculative-grade issuers. Source: S&P Global Ratings Research.|
|List Of Distressed Credits By Issuers|
|Sector/company||Issuer ratings are for a related entity||Issue count||Outstanding amount (mil. $)||Rating||Outlook/ CreditWatch|
|Aerospace and defense|
|Wesco Aircraft Holdings Inc.||1||525.0||CCC-||Negative|
|Ford Motor Co.||2||1550.0||BB+||Negative|
|Midas Intermediate Holdco II LLC||Yes||1||375.0||CC||Negative|
|Ahern Rentals Inc.||1||550.0||CCC+||Negative|
|Chemicals, packaging and environmental services|
|Cornerstone Chemical Co.||1||450.0||B-||Negative|
|TPC Group Inc.,||1||930.0||CCC||Negative|
|Arrow BidCo LLC||Yes||1||340.0||B||Stable|
|Revlon Consumer Products Corp.||1||450.0||CCC-||Negative|
|The GEO Group Inc.||3||900.0||BB-||Negative|
|CCF Holdings LLC||1||276.0||CCC||Negative|
|CNG Holdings Inc.||1||259.0||B||Negative|
|Air Methods Corp.||1||500.0||B-||Negative|
|Envision Healthcare Corp.||1||1026.4||CCC||Negative|
|Tennessee Merger Sub Inc.,||Yes||1||714.4||B-||Negative|
|Pitney Bowes Inc.||1||375.0||BB+||Negative|
|Riverbed Technology Inc.||1||392.4||CC||Negative|
|Homebuilders/real estate companies|
|Diversified Healthcare Trust||1||250||BB||Stable|
|K. Hovnanian Enterprises Inc.||Yes||3||248.9||CCC-||Stable|
|Washington Prime Group L.P.||1||720.9||CC||Negative|
|One Call Corp.||1||2.7||B-||Negative|
|Media and entertainment|
|AMC Entertainment Holdings Inc.||5||2346.3||CC||Negative|
|AMC Entertainment Inc.||Yes||1||98.3||C||Negative|
|Cengage Learning Inc.||Yes||1||620.0||CCC-||Negative|
|Diamond Sports Group LLC||2||1774.8||BB-||Watch Negative|
|Exela Intermediate Co. LLC||Yes||1||1000.0||CCC-||Negative|
|McGraw Hill LLC||1||400.0||B-||Negative|
|National CineMedia LLC||1||230.0||CCC+||Negative|
|Urban One Inc.,||2||350.0||CCC||Negative|
|WeWork Cos. LLC||1||669.0||CCC+||Negative|
|Metals, mining, and steel|
|Alliance Resource Operating Partners L.P.||Yes||1||400.0||B+||Negative|
|CONSOL Energy Inc.||1||176.5||B-||Negative|
|Natural Resource Partners L.P.||1||300.0||B||Negative|
|Peabody Energy Corp.||2||959.0||CCC-||Watch Negative|
|Oil and gas|
|Anadarko Petroleum Corp.||1||5.0||BB+||Watch Negative|
|Basic Energy Services Inc.||1||265.7||CC||Negative|
|Berry Petroleum Company LLC||1||350.0||B-||Negative|
|Centennial Resource Production LLC||3||772.8||CCC+||Negative|
|EnVen Energy Corp.||1||325.0||B-||Negative|
|Forum Energy Technologies Inc.,||1||315.5||CCC+||Negative|
|Global Marine Inc.||1||261.2||CCC-|
|Gran Tierra Energy Inc.||1||300.0||B-||Stable|
|Gran Tierra Energy International Holdings Ltd.||Yes||1||300.0||B-||Stable|
|HighPoint Resources Corp.||2||625.0||CC||Negative|
|KLX Energy Services Holdings Inc.,||1||250.0||CCC+||Stable|
|Laredo Petroleum Inc.||2||1000.0||B-||Negative|
|Moss Creek Resources Holdings Inc.,||2||1200.0||CCC+||Negative|
|Nabors Industries Inc.||5||1440.9||CCC+||Negative|
|Northern Oil and Gas Inc.||1||297.3||CCC+||Negative|
|SM Energy Co.||4||1500.8||CCC+||Negative|
|Talos Production Finance Inc.||1||500.0||B+||Stable|
|Vine Oil & Gas LP||2||880.0||CCC-||Negative|
|W&T Offshore Inc.||1||552.5||CCC+||Negative|
|Weatherford International LLC||Yes||1||2100.0||CCC||Negative|
|Party City Holdings Inc.||2||130.2||CCC||Negative|
|GTT Communications Inc.,||1||575.0||CCC||Watch Negative|
|Trilogy International Partners LLC||1||350.0||B-||Stable|
|United States Cellular Corp.||2||1000.0||BB||Stable|
|American Airlines Group Inc.||2||1250.0||B-||Negative|
|Calumet Specialty Products Partners L.P.||1||550.0||B-||Negative|
|CITGO Holding Inc.||1||1370.0||B-||Stable|
|CSI Compressco LP||1||80.7||B-||Stable|
|Exterran Energy Solutions L.P.||1||375.0||B+||Stable|
|Martin Midstream Partners L.P.||1||291.0||B-||Negative|
|NGL Energy Finance Corp.||Yes||3||1421.5||CCC+||Negative|
|PBF Finance Corp.||Yes||3||1725.0||BB||Negative|
|Talen Energy Supply LLC||5||1213.4||B||Negative|
|Data as of Dec. 31, 2020. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.|
- COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, Jan. 26, 2021
- The Energy Transition: COVID-19 And Peak Oil Demand, Sept. 24, 2020
- S&P Global Ratings Revises Oil And Natural Gas Price Assumptions, Sept. 16, 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;|
|Research Assistant:||Sundaram Iyer, Mumbai|
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