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Credit Trends: The U.S. Distress Ratio Is Down Nearly 90% Since March


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Credit Trends: U.S. Corporate Bond Yields As Of April 7, 2021


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Credit Trends: The U.S. Distress Ratio Is Down Nearly 90% Since March

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 relative to U.S. Treasuries--continued to trend downward in February, reaching 4.0% after peaking at 35.2% just 11 months prior. The ratio has now dropped to its lowest level since May 2011, when the distress ratio reached 3.6%. Meanwhile, the U.S. speculative-grade default rate is finally showing signs of slowing, falling to 6.6% in January 2021 from 6.7% as of December 2020 and U.S. composite spreads tightened overall and for issuers rated 'CCC' and below.


What's Pushing Down The Distress Ratio?

Continued support from U.S. monetary and fiscal policy has stabilized borrowing conditions, pushing down the overall distress ratio. U.S. composite spreads have compressed across all rating categories, but are steeper among issuers rated 'BB' and below. Over the past 11 months, the average option-adjusted spread among issues rated 'CCC+' and below has tightened significantly. Issuance activity in the U.S. has remained high through February, even for lower-rated issuers.

We expect the U.S. distress ratio to remain relatively stable in the near term, although risks remain, including the possibility of further waves in the COVID-19 virus, which may lead to additional economic lockdowns. Additionally, Treasury yields have been steadily rising, which so far has had little effect on credit markets but may put additional liquidity pressure on speculative-grade issuers.

The number of distressed issues has moved dramatically over the last seven months. In March 2020, we had 736 issues trading at distressed levels as COVID-19's spread raised credit risks across sectors. Since then, there have been 666 removals, almost 76% of which were due to spreads narrowing to pre-pandemic levels. Many issuers that had issues trading at distressed levels in March have defaulted over the past 11 months as the U.S. speculative-grade default rate reached a peak of 6.7% in December. Only 70 issues of the 736 remain on this month's distressed list, and only 19 issues have been added since March.

Chart 2


The Distress Ratio Has Improved Across Most Sectors

As borrowing conditions remain largely favorable, many sectors' distress ratios are lower than they were at this point in 2020 (see chart 3). The oil and gas sector has the highest distress ratio, at 14.3%, but has recovered substantially from its March high of 93%. Meanwhile, supply chains are limiting recoveries in the automotive and homebuilders and real estate sectors, which have higher distress ratios than they did at this point in 2020, even as end-market demand stabilizes.

Chart 3


Table 1

Oil And Gas, Media And Entertainment, And Utilities Account For Two-Thirds Of Distressed Debt
Distressed ratio (%)* Debt-based distressed ratio (%) Number of distressed issues Total debt affected (mil. $) Percent change of distressed credits by sector
Aerospace & defense 2.70 1.86 1.00 525.00 -
Automotive 2.86 3.51 2.00 1,550.00 (33.33)
Banks and brokers 0.00 0.00 0.00 0.00
Capital goods 3.28 3.36 2.00 1,065.00 -
Chemicals, packaging & environmental services 0.91 1.58 1.00 930.00 -
Consumer products 2.40 1.31 4.00 1,390.00 (20.00)
Financial institutions 0.90 1.19 3.00 835.00 -
Forest products & building materials 0.00 0.00 0.00 0.00
Health care 1.00 1.28 1.00 1,026.45 (50.00)
High technology 1.98 0.63 2.00 384.46 -
Homebuilders/real estate co. 6.32 4.33 6.00 1,569.76 20.00
Insurance 8.33 3.08 3.00 552.68 -
Media & entertainment 3.65 4.79 11.00 9,562.44 (8.33)
Metals, mining & steel 4.76 2.35 3.00 727.46 (40.00)
Oil & gas 14.29 12.34 29.00 12,009.65 16.00
Retail/restaurants 2.59 1.31 3.00 682.92 (25.00)
Telecommunications 3.67 1.70 4.00 1,925.00 -
Transportation 0.00 0.00 0.00 0.00 (100.00)
Utility 6.25 4.43 14.00 5,638.56 (22.22)
Total 3.95 3.31 89.00 40,374.39 (7.29)
Data as of Feb. 22, 2021. *The 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. Source: S&P Global Ratings Research.

Additional Charts

Chart 4


Chart 5


Table 2

Credit Stats For The Top Three Distressed Sectors (%)
Current negative bias* Long-term average of negative bias* Proportion of 'B-' & below new issues (trailing three years)§ Proportion of 'B-' & below outstanding issuer ratings†
Oil & gas 55.1 20.8 16 55.7
Insurance 12.1 17.3 6 14.8
Homebuilders/real estate co. 16.9 13.8 18 10.3
Data as of Feb. 22, 2021. *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
Ford Motor Co. 2 1550.0 BB+ Negative
Capital goods
Ahern Rentals Inc. 1 550.0 CCC+ Negative
Aptim Corp. 1 515.0 CCC+ Stable
Chemicals, packaging and environmental services
TPC Group Inc., 1 930.0 CCC Negative
Consumer products
Arrow BidCo LLC Yes 1 340.0 B Stable
GEO Group Inc. (The) 2 600.0 BB- Negative
Revlon Consumer Products Corp. 1 450.0 CCC- 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
Envision Healthcare Corp. 1 1026.4 CCC Negative
High technology
Pitney Bowes Inc. 1 375.0 BB Stable
Riverbed Technology Inc. 1 9.5 CCC+ Negative
Homebuilders/real estate companies
Diversified Healthcare Trust 2 600.0 BB- Negative
K. Hovnanian Enterprises Inc. Yes 3 248.9 CCC+ Stable
Washington Prime Group L.P. 1 720.9 CC Negative
Assurant Inc. 1 250.0 BBB Stable
One Call Corp. 1 2.7 B- Negative
Unum Group 1 300.0 BBB Stable
Media and entertainment
AMC Entertainment Holdings Inc. 3 1646.3 CCC- Negative
AMC Entertainment Inc. Yes 1 98.3 CCC- Negative
Diamond Sports Group LLC 3 4824.8 CCC+ Negative
Exela Intermediate Co. LLC Yes 1 1000.0 CCC- Negative
Staples Inc. 1 1000.0 B Negative
Vericast Corp. 1 324.0 CCC+ Negative
WeWork Cos. LLC 1 669.0 CCC+ Negative
Metals, mining and steel
CONSOL Energy Inc. 1 167.1 B- Negative
Peabody Energy Corp. 2 560.3 CCC+ Negative
Oil and gas
Anadarko Petroleum Corp. 1 5.0 BB- Negative
Basic Energy Services Inc. 1 300.0 CCC- Negative
Callon Petroleum Co. 5 1515.0 CCC+ Negative
EnVen Energy Corp. 1 325.0 B- Negative
Forum Energy Technologies Inc., 1 315.5 CCC+ Negative
Global Marine Inc. Yes 1 261.2 CCC- Negative
Gran Tierra Energy Inc. 1 300.0 B- Stable
Gran Tierra Energy International Holdings Ltd. Yes 1 300.0 B- Stable
Great Western Petroleum LLC 1 235.0 CCC- Watch Positive
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. 4 1245.5 CCC+ Negative
Talos Production Finance Inc. Yes 1 600.0 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. 1 22.9 CCC+ Positive
QVC Inc. 2 660.0 BB- Negative
GTT Communications Inc., 1 575.0 CCC Negative
Trilogy International Partners LLC 1 350.0 B- Stable
United States Cellular Corp. 2 1000.0 BB Stable
CSI Compressco LP 1 80.7 B- Stable
Exterran Energy Solutions L.P. 1 375.0 B+ Stable
NGL Energy Finance Corp. Yes 2 766.3 B Negative
PBF Finance Corp. Yes 4 2975.0 B+ Negative
Ruby Pipeline LLC 1 518.8 B- Watch Negative
Summit Midstream Finance Corp. Yes 1 259.5 CCC+ Negative
Talen Energy Supply LLC 4 663.3 B Negative
Data as of Feb. 22, 2021. The list excludes companies with confidential ratings. Source: S&P Global Ratings Research.

Related Research

Corporate America Not Likely To Unwind COVID-19 Debt Buildup Despite Credit Hits, Feb. 22, 2021

The U.S. Speculative-Grade Corporate Default Rate Could Reach 7% By December 2021, Feb. 19, 2021

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:Abhik P Debnath, Mumbai

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