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Credit Trends: Recovery In Oil And Gas Brings The U.S. Distress Ratio Down To 2.3%

Chart 1

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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--fell to 2.3% as of June 21, 2021, from 2.6% as of May 17, 2021, reaching its lowest point since August 2007.

June's decrease in the distress ratio was in part due to the steep decrease in the oil and gas distress ratio, declining to 2.1% from 5.1% in the previous month, and marking the sector's lowest distress ratio since January 2008. Although the sector faced immense pressure in 2020, when its distress ratio reached 95%, credit metrics have since stabilized and oil prices recently touched a six-year high before declining. The steady decrease in the sector's distress ratio over the last 18 months has primarily mirrored the decline of the oil and gas speculative-grade composite spread--which has decreased to 432 basis points (bps), significantly below prepandemic levels of 750 bps and the high of 1,655 bps (see chart 1). The sector's speculative-grade negative bias is following a similar trajectory, falling to 23% from 81% in June 2020, although it remains slightly above its long-term average of 20% (see chart 2).

Chart 2

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U.S. speculative-grade issuance in the oil and gas sector remains robust in 2021, with close to $18 billion dollars of U.S. primary issuance through June 30, as financing conditions remain extremely benign, even for lower rated issuers. So far in 2021, speculative-grade issuance in the oil and gas sector is the highest since 2015 (see chart 3). However, as environmental, social, and governance (ESG) mandates are increasingly factored into investment decisions, S&P Global Ratings has observed higher funding costs for the most carbon-intensive borrowers from the North American energy sector compared with those that showed the lowest carbon intensity (see "The Energy Transition: ESG Concerns Are Starting To Present Capital Market Challenges To North American Energy Companies," June 13, 2021).

Chart 3

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Additional Exhibits:

Chart 4

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Table 1

Insurance; Metals, Mining, And Steel; And Utilities Have The Highest Distress Ratios
Distress ratio (%)* Debt-based distress ratio (%) Number of distressed issues Total debt affected (mil. $) Percent change of distressed credits by sector
Aerospace and defense 2.70 1.90 1 525 0
Automotive 2.70 3.30 2 1,550 0.0
Banks and brokers 0.00 0.00 0 0 0.0
Capital goods 3.20 3.40 2 1,065 0.0
Chemicals, packaging, and environmental services 0.90 1.50 1 930 0.0
Consumer products 2.30 1.20 4 1,350 0.0
Financial institutions 0.60 0.80 2 559 0.0
Forest products and building materials 0.00 0.00 0 0 0.0
Health care 1.00 1.30 1 1,026 0.0
High technology 2.10 0.70 2 385 0.0
Homebuilders/real estate co. 3.40 2.00 3 690 0.0
Insurance 5.70 3.00 2 550 0.0
Media and entertainment 2.20 3.60 7 7,633 (30)
Metals, mining, and steel 4.80 2.70 3 867 (25)
Oil and gas 2.10 1.30 4 1,299 (60)
Retail/restaurants 2.50 1.30 3 683 0.0
Telecommunications 3.40 1.70 4 2,075 0.0
Transportation 0.00 0.00 0 0 0.0
Utilities 4.80 2.60 11 3,485 37.5
Total 2.32 1.98 52 24,671 (11.51)
Data as of June 21, 2021. *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. Distribution of distressed credits is defined as the distribution, by sector, within all speculative-grade issues with option-adjusted spreads above 1,000 basis points. 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.

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†
Insurance 8.9 17.2 9.1 15.4
Metals, mining, and steel 29.2 25.5 9.1 33.3
Utilities 24.3 19.1 6.6 24.6
*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. Data through 6/21/2021.

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 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

GEO Group Inc. (The)

3 900.0 CCC+ Negative

Revlon Consumer Products Corp.

1 450.0 CCC- Negative
Financial institutions

CNG Holdings Inc.

1 259.0 B- Stable

Navient Corp.

1 300.0 BB- Stable
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 1 90.0 CCC+ Stable
Insurance

Assurant Inc.

1 250.0 BBB Stable

Unum Group

1 300.0 BBB Stable
Media and entertainment

AMC Entertainment Holdings Inc.

1 1,460.0 CCC+ Positive

AMC Entertainment Inc.

Yes 1 98.3 CCC+ Positive

Carlson Travel Inc.

1 250.0 CCC Negative

Diamond Sports Group LLC

3 4,824.8 CCC+ Negative

Exela Intermediate Co. LLC

Yes 1 1,000.0 CCC- Negative
Metals, mining and steel

AU Holdings LLC

Yes 1 193.9 CCC Negative

Peabody Energy Corp.

2 672.6 CCC Negative
Oil and gas

Global Marine Inc.

Yes 1 261.2 CCC- Negative

Great Western Petroleum LLC

1 235.0 B- Stable

KLX Energy Services Holdings Inc.,

1 250.0 CCC+ Stable

W&T Offshore Inc.

1 552.5 CCC+ Negative
Retail/restaurants

Party City Holdings Inc.

1 22.9 CCC+ Positive

QVC Inc.

2 660.0 BB- Stable
Telecommunications

GTT Communications Inc.,

1 575.0 CCC- Negative

United States Cellular Corp.

3 1,500.0 BB Stable
Utilities

CSI Compressco LP

1 155.0 B- Stable

Exterran Energy Solutions L.P.

1 375.0 B+ Stable

PBF Finance Corp.

Yes 3 1,725.0 B+ Negative

Talen Energy Supply LLC

6 1,230.0 B Watch Negative
Data as of June 21, 2021. 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
Research Contributor:Nivritti Mishra Richhariya, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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