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Credit Trends: U.S. Distress Ratio Eases With Ample Liquidity For Lower-Rated Borrowers

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Credit Trends: U.S. Distress Ratio Eases With Ample Liquidity For Lower-Rated Borrowers

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.

Chart 1

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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.

Chart 2

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Table 1

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)
Automotive 4.1 4.2 3 1925 0.0
Banks and brokers
Capital goods 3.3 3.4 2 1065 (50)
Chemicals, packaging, and environmental services 1.8 2.3 2 1380 100.0
Consumer products 3 1.6 5 1690 -16.7
Financial institutions 0.9 1.2 3 835 -62.5
Forest products and building materials
Health care 2.9 2.7 3 2241 (50)
High technology 2.1 1.3 2 767 0.0
Homebuilders/real estate companies 5.6 3.5 5 1220 25.0
Insurance 8.6 3.2 3 553 50.0
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
Retail/restaurants 3.5 1.5 4 790 -82.6
Telecommunications 4.8 1.8 5 1936 0.0
Transportation 4.8 4.4 2 1250 0.0
Utility 7.1 5.6 16 7027 (20)
Total 5.03 3.93 112 $ 47,332 -32.12
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.

Additional Charts

Chart 3

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Chart 4

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Table 2

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
Insurance 14.3 16.9 0 0.1
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.

Table 3

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
Automotive
Ford Motor Co. 2 1550.0 BB+ Negative
Midas Intermediate Holdco II LLC Yes 1 375.0 CC Negative
Capital goods
Ahern Rentals Inc. 1 550.0 CCC+ Negative
Aptim Corp. 1 515.0 CCC+ Negative
Chemicals, packaging and environmental services
Cornerstone Chemical Co. 1 450.0 B- Negative
TPC Group Inc., 1 930.0 CCC Negative
Consumer products
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
Financial institutions
CCF Holdings LLC 1 276.0 CCC Negative
CNG Holdings Inc. 1 259.0 B Negative
Navient Corp. 1 300.0 BB- Negative
Health care
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
High technology
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
Insurance
Assurant Inc. 1 250 BBB Stable
One Call Corp. 1 2.7 B- Negative
Unum Group 1 300.0 BBB Stable
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
Quad/Graphics Inc. 1 238.7 B Stable
Staples Inc. 1 1000.0 B Negative
Urban One Inc., 2 350.0 CCC Negative
Vericast Corp. 1 324.0 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
Retail/restaurants
Party City Holdings Inc. 2 130.2 CCC Negative
QVC Inc. 2 660.0 BB- Negative
Telecommunications
GTT Communications Inc., 1 575.0 CCC Watch Negative
Intrado Corp. 1 10.6 B- Negative
Trilogy International Partners LLC 1 350.0 B- Stable
United States Cellular Corp. 2 1000.0 BB Stable
Transportation
American Airlines Group Inc. 2 1250.0 B- Negative
Utilities
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.

Related Research

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
Research Assistant:Sundaram Iyer, Mumbai

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