- The U.S. distress ratio fell for the 11th consecutive month, hitting 4.0% as of Feb. 22, 2021--the lowest in almost 10 years--from 4.3% as of Jan. 29.
- U.S. composite spreads tightened generally and for issuers rated 'CCC' and below.
- The U.S. speculative-grade default rate finally showed signs of slowing, falling only slightly to 6.6% in January 2021 from 6.7% as of December 2020.
- The distress ratio has eased significantly in almost all sectors, but the oil and gas sector stands out with its double-digit distress ratio of 14.3%.
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.
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.
|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||-|
|Banks and brokers||0.00||0.00||0.00||0.00|
|Chemicals, packaging & environmental services||0.91||1.58||1.00||930.00||-|
|Forest products & building materials||0.00||0.00||0.00||0.00|
|Homebuilders/real estate co.||6.32||4.33||6.00||1,569.76||20.00|
|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|
|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.|
|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|
|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.|
|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|
|Ahern Rentals Inc.||1||550.0||CCC+||Negative|
|Chemicals, packaging and environmental services|
|TPC Group Inc.,||1||930.0||CCC||Negative|
|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|
|CCF Holdings LLC||1||276.0||CCC||Negative|
|CNG Holdings Inc.||1||259.0||B||Negative|
|Envision Healthcare Corp.||1||1026.4||CCC||Negative|
|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|
|One Call Corp.||1||2.7||B-||Negative|
|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|
|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|
|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.|
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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