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Credit Trends: The U.S. Distress Ratio Drops To Just 2.6%


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Credit Trends: The U.S. Distress Ratio Drops To Just 2.6%

Chart 1


S&P Global Ratings' 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--fell to 2.6% as of May 17, 2021, from 2.9% as of April 30, 2021, reaching its lowest since October 2007. The 32.6 percentage point decline in the distress ratio since March 2020 (from 35.2%) represents the sharpest recovery since we began tracking the distress ratio.

The composition of distressed credits has also changed considerably over this period, with the percentage of 'B' and 'BB' rated credits falling to approximately 40% from 75%, while the percentage of 'CCC' credits has risen in the same period to approximately 60% from 30%.

Much of the tightening in the distress ratio can be attributed to the narrowing of speculative-grade composite spreads to seven-year lows (see chart 3), fueled by accommodative financing conditions and an improved economic outlook. The 'CCC' composite spread, for instance, narrowed in May to 614 bps from highs in March 2020 of over 1,800 bps, as investors' relentless search for yield continued. Additionally, the concerted and swift policy actions of the Federal Reserve were not enough to protect some distressed issuers, whose defaults over the past 12 months have also contributed to the fall in the distress ratio.

Chart 2


Chart 3


Lowering Our U.S. Speculative-Grade Default Forecast

The distress ratio is a leading indicator of the speculative-grade default rate, and the rise in the distress ratio in the first quarter of 2020 preceded a rise in defaults among speculative-grade rating categories. The 12-month trailing default rate for 'CCC'/'C' rose to a peak of 49.7% at the start of 2021, and we saw similar rises in the 'B' and 'BB' rating categories' default rates, to 3.7% and 1.3%, respectively.

Now a falling distress ratio, strong U.S. economic outlook, and continuously improving positive bias (the proportion of issuers with positive rating outlooks or ratings on CreditWatch with positive implications) have in part led us to revise our default forecast. We currently expect the U.S. trailing-12-month speculative-grade corporate default rate will fall to 4% by March 2022 from 6.3% in March 2021 (see "The U.S. Speculative-Grade Corporate Default Rate Could Fall To 4% By March 2022," May 26, 2021).

Chart 4


Distress Has Receded Across Sectors

We have seen significant drops in distress ratios across sectors. The metals, mining, and steel; insurance; and oil and gas sectors exhibit the highest distress ratios, at 6.56%, 5.56%, and 5.26%, respectively, but these are low in comparison with sector averages at this point in 2020.

The high distress ratio for the insurance sector is primarily because of the relatively low number of issuers with speculative-grade ratings in the sector, rather than any systemic risk. The negative bias (the proportion of issuers with negative rating outlooks or ratings on CreditWatch with negative implications) for the insurance sector, at 8.1%, is far lower than the long-term average of 16.9% (see table 1).

On the other hand, the media and entertainment sector has one of the highest number of distressed credits, at 10--in line with oil and gas sector--and has the highest negative bias among all sectors at 39.7% as of May 17.

Table 1

Credit Stats For The Top Three Distressed Sectors
(%) Current negative bias* Long-term average of negative bias* Proportion of 'B-' and lower new issues (trailing three years)§ Proportion of 'B-' and lower outstanding issuer credit ratings†
Metals, mining, and steel 28.6 25.6 10 33.3
Insurance 8.1 16.9 5 15.4
Oil and gas 26.0 21.4 15 53.3
*Negative bias is calculated as the number of U.S. issuers with either negative rating outlooks or ratings on CreditWatch negative divided by the total number of U.S. issuers with either positive, negative, or stable outlooks 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. Data through May 17, 2021. Source: S&P Global Ratings Research.

Additional Tables

Table 2

Metals, Mining, And Steel; Insurance; And Oil And Gas Have The Highest Distress Ratios
Distress ratio (%)* Debt-based distress ratio (%)§ Number of distressed issues Total debt affected (mil. $) Percentage change in distressed credits by sector
Aerospace and defense 2.70 1.89 1 525 0.0
Automotive 2.63 3.30 2 1,550 0.0
Banks and brokers 0.00 0.00 0 0
Capital goods 3.33 3.48 2 1,065 0.0
Chemicals, packaging, and environmental services 0.88 1.52 1 930 0.0
Consumer products 2.27 1.20 4 1,350 33.3
Financial institutions 0.62 0.80 2 559 0.0
Forest products and building materials 0.00 0.00 0 0
Health care 0.99 1.23 1 1,026 0.0
High technology 1.96 0.60 2 384 0.0
Homebuilders/real estate companies 3.03 1.83 3 690 0.0
Insurance 5.56 2.96 2 550 0.0
Media and entertainment 3.27 4.04 10 8,143 0.0
Metals, mining, and steel 6.56 3.25 4 1,034 0.0
Oil and gas 5.26 5.63 10 5,390 (37.5)
Retail/restaurants 2.48 1.23 3 683 0.0
Telecommunications 3.48 1.75 4 2,075 33.3
Transportation 0.00 0.00 0 0
Utility 3.56 1.45 8 1,880 (20.0)
Total 2.62 2.24 59 27,835 (9.2)
*S&P Global Ratings' 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. §Outstanding debt amount associated with distressed issues divided by the total debt outstanding 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. Data as of May 17, 2021. Source: S&P Global Ratings Research.

Table 3

List Of Distressed Credits By Issuer
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 1,550.0 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 1,026.4 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 1,646.3 CCC- Negative

AMC Entertainment Inc.

Yes 1 98.3 CCC- Negative

Diamond Sports Group LLC

3 4,824.8 CCC+ Negative

Exela Intermediate Co. LLC

Yes 1 1,000.0 CCC- Negative

Staples Inc.

1 1,000.0 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 1,515.0 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 1,000.0 B- Negative

Moss Creek Resources Holdings Inc.

2 1,200.0 CCC+ Negative

Nabors Industries Inc.

4 1,245.5 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 2,100.0 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 1,000.0 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 2,975.0 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
This list excludes companies with confidential ratings. Data as of May 17, 2021. 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;
Research Contributor:Abhik Debnath, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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