(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated in the 'CCC' category. Because the majority of defaults are from these companies, those with negative outlooks or ratings on CreditWatch negative are even more important to monitor as credit quality recovers from the unprecedented downturn.)
- The tally of European companies rated in the 'CCC' category or lower remained elevated in June, while the North American tally has been falling since the first quarter.
- The lag in recovery is correlated to pandemic lockdown measures: One-third of the 'CCC' or lower European companies depend highly on travel, lodging, and events-driven entertainment.
- Media, entertainment, and leisure contribute the most to Europe's 'CCC' rating category by both issuer count and debt amount.
The number of companies S&P Global Ratings rates in the 'CCC' category or lower remains well above pre-pandemic levels in Europe. In fact, the tally has risen higher than the initial peaks from spring 2020. Still, so far in 2021, credit metrics are improving for speculative-grade (rated 'BB+' or lower) nonfinancial corporate issuers. Net rating actions (upgrades minus downgrades) have been positive, owing to improved financing access, low spreads, and business recovery in certain industries. However, much improvement is needed to make up for the downgrades in 2020.
Europe has experienced a lag in recovery, as measured by the percentage of 'CCC' and lower issuers, compared with the U.S. and Canada. The latter countries have rebounded more quickly than others due to a decline in COVID-19 case counts. The U.S. and Canada's percentage of 'CCC' and lower companies among total speculative-grade companies has fallen to 15%, from a peak of 18% in May 2020, while the same percentage is elevated at 13% in Europe. This suggests the overhang in 'CCC' rated companies in Europe compared with North America relates to the sustainability of capital structures, in light of our expectations of weaker recovery and high uncertainty due to still-prevalent lockdown measures in Europe.
Two-thirds of European 'CCC' and lower issuers have less than adequate or weak liquidity, indicating that the sources of funding available to them within the next 12 months are highly susceptible to operating performance and access to capital markets. Only a small cohort have risk to covenant breaches during that period, all pending the outcome of bookings during the summer season. Average weighted debt-to-EBITDA leverage for the 'CCC' rating category is 11.4x with 2x interest coverage, indicating we expect unsustainable leverage over the next two years for these issuers, barring unforeseen favorable developments on the operating side.
Media, entertainment, and leisure account for 19 of the 57 companies in the 'CCC' category. The majority of these 19 issuers are in events- and travel-related entertainment, leisure, lodging, media rights, events organizing (including sports), and cinemas. Media and entertainment also remains most 'CCC' exposed by debt amount, with $26.8 billion in 'CCC' debt, 82% of which has negative bias (negative rating outlooks or ratings on CreditWatch with negative implications) and is therefore at risk of further downgrade or default. The oil and gas sector also holds a large volume of 'CCC' debt, with over $15 billion, nearly all of which is U.S. dollar denominated, and with 80% showing negative bias. By country, the U.K. and France have the highest 'CCC' or lower debt with negative bias, with $63 billion and $56 billion, respectively.
Favorable market conditions, even at the lower rating levels, allowed European corporate bond issuance rated 'CCC' and below as of June 2021 to reach US$6 billion, which is 50% higher than at the same point last year. Meanwhile, 'BB' rated issuance through June stood two-thirds higher than at that point in 2020.
Despite an elevated number of 'CCC' and below rated issuers, defaults Europe have slowed. There were only three defaults from the region in the second quarter of 2021, down from eight in the first quarter. Europe's corporate default total so far in 2021 is 11, less than 16 at this point in 2020. The European speculative-grade default rate fell to 5.4% in May 2021, and we expect it to fall to 5.25% by March 2022 (see "Default Rates Fall And The June Tally Hits A Four-Year Low," July 1, 2021, and "The European Speculative-Grade Corporate Default Rate Could Fall To 5.25% By March 2022," May 26, 2021).
Spreads do not yet reflect inflation concerns. Europe's corporate five-year composite spreads were largely steady in June 2021, with spreads narrowing to 34 basis points (bps) on June 11 from 37.5 bps in the previous month.
|European Current Gross Leverage Comparison By Type of Owner (Median)|
|Business risk profile||Number||Debt to EBITDA||Interest coverage||% of total|
|N.M.--Not meaningful. Data as of June 30, 2021. Source: S&P Global Ratings.|
- European Leveraged Finance And Recovery Second-Quarter 2021 Update: Late Cycle Behavior Or A Brave New World?, July 20, 2021
- CLO Pulse Q1 2021: Sector Averages Of Reinvesting European CLO Assets, July 8, 2021
This report does not constitute a rating action.
|Credit Markets Research:||Nicole Serino, New York + 1 (212) 438 1396;|
|European Leveraged Finance:||Marta Stojanova, London + 44 20 7176 0476;|
|Research Contributor:||Shripati Pranshu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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