(Editor's Note: Our "Risky Credits: series focuses on U.S. and Canadian 'CCC' rated corporate issuers, as well as their first cousins rated 'B-'. Because the majority of defaults are from companies rated in the 'CCC' category, these and 'B-' rated companies with negative outlooks or ratings on CreditWatch negative are even more important to monitor in this unprecedented downturn and uncertain recovery.)
- The number of 'CCC' category ratings on U.S. and Canadian companies declined to a near pre-pandemic low of 163 as of Aug. 31, 2021.
- Nearly 75% of 'CCC' rating actions so far in 2021 have been upgrades--the highest among speculative-grades rating categories.
- The media and entertainment sector led with the greatest number of upgrades in the last month and continue to hold the highest upgrade potential.
- North American 'CCC' issuance is now higher than previous year-end levels.
On This Month's Front Burner
Net upgrades are highest in the 'CCC' rating category Upgrades far outpaced downgrades in the 'CCC' rating category for the eighth consecutive month as 'CCC' net upgrades (upgrades minus downgrades) remain at the highest level among all other rating categories (see chart 1). Although recovering, the number of 'CCC' rated issuers remains higher than it was pre-pandemic (137), as downgrades into the rating category in 2020 still outweigh the upgrades. In August 2021, the upgrades out of the 'CCC' category were distributed across sectors, one each from consumer products, automotive, retail/restaurants and media and entertainment. The downgrade rate (the number of 'CCC' rated actions and below downgrades divided by the total rating actions to and from the 'CCC' rating category) ticked up to 42% in August (see chart 2).
Media and entertainment has most room for upgrades By sector, media and entertainment led upgrades last month as two U.S. gaming operators (Downstream Development Authority and Saracen Development LLC) were upgraded out of the 'CCC' rating category. With the highest number of 'CCC' issuers either on CreditWatch positive or with a positive outlook (with four), the sector holds the highest upgrade potential. U.S. advertising in particular has been leading the recovery of the media industry so far in 2021 where a rise in revenue has been stronger than expected (see "U.S. Media And Entertainment Industry Check In," Sept. 1, 2021).
'CCC' issuance is 2.2x 2020 year-to-date and 'B/B-' is 2.0x After a strong start to the year, issuance slowed in the past two months, bringing the ratio for issuance so far in 2021 to same-date 2020 to 2.2 from 2.4 for 'CCC and below', and to 1.9 from 2.4 for 'B/B-' versus the end of June 2021. But these levels are still significantly higher than issuances in 2019 as investors' hunt for yield pushed speculative-grade bond, leveraged loan, and collateralized obligation totals to multiyear, and in some cases, record-breaking first-half totals in 2021 (see "Global Financing Conditions: Bond Issuance Remains Strong Despite An Expected Modest Contraction," July 26, 2021).
Defaults continue to slow There were only five defaults from the region in July and August. With these defaults, the North American total so far 2021 is 32, less than a third of 2020's year-to date total of 117. The U.S. speculative grade default rate fell to 3.1% in July 2021 and is expected to fall to 2.5% by June 2022. (see "U.S. Corporate Defaults Through August Mark A Seven-Year Low," Sept. 3, 2021, and "The U.S. Speculative-Grade Corporate Default Rate Could Fall To 2.5% By June 2022," Aug. 20, 2021).
Transitioning to 'CCC' ticks up, but remains low Transition into the 'CCC' and 'B-' categories ticked up slightly in August 2021, but remained low at only 0.7% (versus the long-term weighted average of 2.2%), and there were no transitions into 'B-' from 'B' ratings (compared with the 1.3% long-term weighted average). The negative bias--issuers with a negative outlook or CreditWatch placement with negative implications--of 'CCC' rated issuers has lowered to an all-time low of 65%. The negative bias for 'B-' rated issuers has also dropped to its all-time low of 13.7% in August 2021.
Spreads widened in August but remain extremely tight U.S. 'CCC' and 'B' composite spreads were largely steady in July and August 2021 with 'CCC' spreads widening slightly to 621 basis points (bps) and the 'B' spread also widening to 404 bps (over two months) in tandem with slowing issuance.
Bids recover The average bid of 'B' rated loans remained mostly steady since our last report at 99.08, as of Aug. 31, 2021, while the bid for 'CCC' rated loans has narrowed by 0.26 bps to 92.50.
CLO collateral actions remain positive Despite negative rating actions on a few widely held issuers and the small increase in the average collateralized loan obligation (CLO) 'CCC' bucket size, average S&P Global Ratings' weighted average rating factor values across the index barely moved; this metric (which captures changes in rating profiles of CLO collateral pools) has improved notably since the start of the year. This is due, in part, to the volume of positive rating actions so far in 2021, with upgrades outpacing downgrades across U.S. CLO obligors every month), as well as manager intervention (average turnover has approached 40% since the start of 2021--significantly higher than this time last year at about 28%). The average proportion of the portfolio that has a rating with a negative outlook has declined to 16.4%, about half of what it was at the start of the year (32.4%); obligors with ratings on CreditWatch negative have gone up and down, but they currently sit at 0.77% of total collateral versus 1.62% in January (see table 3).
|Top 20 Rating Changes To 'CCC' From 'B-' By Debt Amount (Beginning 2020)|
|Rating Date||Issuer||Country||Sector||Rating to||Rating from||Debt amount (mil. $)|
|8/5/2021||China Evergrande Group||U.S.||Homebuilders/real estate companies||CCC||B-||16,260|
|1/27/2021||Viking Cruises Ltd. (Viking Holdings Ltd.)||U.S.||Media/entertainment||CCC+||B-||3,225|
|5/25/2021||GEO Group (The) Inc.||U.S.||Consumer products||CCC+||B||2,734|
|4/1/2021||Epic Crude Services L.P.||U.S.||Utility||CCC+||B-||1,175|
|5/12/2021||WaterBridge Operating LLC (WaterBridge Resources LLC)||U.S.||Utility||CCC+||B-||1,000|
|8/31/2021||Zep Inc.||U.S.||Chemicals, packaging, and environmental services||CCC+||B-||725|
|4/9/2021||Ruby Pipeline LLC||U.S.||Utility||CCC||B-||825|
|2/26/2021||Dawn Acquisitions LLC (Infra Colodata Holdings LLC)||U.S.||Telecommunications||CCC||B-||550|
|8/19/2021||JSG I Inc.||U.S.||Capital goods||CCC+||B-||460|
|4/16/2021||Cornerstone Chemical Co.||U.S.||Chemicals, packaging, and environmental services||CCC+||B-||450|
|1/25/2021||PetroChoice Holdings Inc.||U.S.||Consumer products||CCC+||B-||435|
|6/17/2021||Salient CRGT Inc.||U.S.||Aerospace & Defense||CCC||B-||420|
|4/8/2021||BEP Ulterra Holdings Inc.||U.S.||Oil and gas exploration/production||CCC+||B-||415|
|3/19/2021||MVK Intermediate Holdings LLC||U.S.||Consumer products||CCC+||B||335|
|5/11/2021||Overseas Shipholding Group Inc.||U.S.||Transportation||CCC+||B-||325|
|1/29/2021||Terra-Gen Finance Co. LLC (Terra-Gen Power Holding II LLC)||U.S.||Utility||CCC+||B-||320|
|5/6/2021||New Constellis Borrower LLC (New Constellis Holdings Inc.)||U.S.||Aerospace/defense||CCC+||B-||260|
|Data as of Aug. 31, 2021. Source: S&P Global Ratings.|
|Top 20 Rating Upgrades From 'CCC' Category (Beginning 2021)|
|Issuer||Country||Sector||Rating to||Rating from||Debt amount (mil. $)|
|6/17/2021||Community Health Systems Inc.||U.S.||Health care||B-||CCC+||17,382|
|4/29/2021||Endeavor Operating Co. LLC||U.S.||Media/entertainment||B||CCC+||9,172|
|1/21/2021||NGL Energy Partners L.P.||U.S.||Utility||B||CCC+||8,200|
|4/9/2021||First Quantum Minerals Ltd.||Canada||Metals, mining, and steel||B||CCC+||5,900|
|4/15/2021||MEG Energy Corp.||Canada||Oil/gas exploration and production||B+||CCC+||3,550|
|8/26/2021||CB Poly Investments LLC||United States||Consumer products||B-||CCC+||3,520|
|1/21/2021||Petco Holdings Inc.||U.S.||Retail/restaurants||B-||CCC+||3,200|
|3/24/2021||SM Energy Co.||U.S.||Oil/gas exploration and production||B-||CCC+||2,747|
|2/10/2021||Cengage Learning Holdings II Inc.||U.S.||Media/entertainment||B-||CCC+||2,555|
|3/3/2021||Kenan Advantage Group Inc.||U.S.||Transportation||B-||CCC+||2,398|
|3/16/2021||FXI Holdings Inc.||U.S.||Chemicals, packaging, and environmental services||B-||CCC+||2,075|
|1/7/2021||Urban One Inc.||U.S.||Media/entertainment||B-||CCC||1,872|
|6/3/2021||Heartland Dental LLC (Hadrian Merger Sub Inc.)||U.S.||Health care||B-||CCC+||1,810|
|3/31/2021||Priority Holdings LLC (Priority Technology Holdings Inc.)||U.S.||High technology||B-||CCC+||1,777|
|3/29/2021||Vine Oil & Gas L.P. (Vine Energy Inc.)||U.S.||Oil/gas exploration and production||B-||CCC+||1,760|
|2/18/2021||Mohegan Tribal Gaming Authority||U.S.||Media/entertainment||B-||CCC+||1,696|
|3/31/2021||CPM Holdings Inc.||U.S.||Capital goods||B-||CCC+||1,480|
|3/15/2021||NESCO Holdings Inc.||U.S.||Capital goods||B||CCC+||1,395|
|5/6/2021||PMHC II Inc.||U.S.||Chemicals, packaging, and environmental services||B-||CCC+||1,330|
|5/28/2021||ASP Unifrax Holdings Inc.||U.S.||Capital goods||B-||CCC+||1,329|
|5/6/2021||Welbilt Inc.||U.S.||Capital goods||B-||CCC+||1,325|
|Data as of June 30, 2021. Source: S&P Global Ratings.|
|CLO BSL Index Metrics|
|(CLO Insights 2021 U.S. BSL Index)|
|BSL||B-' Bucket||CCC' bucket||Nonperforming bucket||SPWARF (%)||CreditWatch Neg||Outlook Neg|
|BSL CLO--Broadly syndicated loan collateralized loan obligation. SPWARF--S&P Global Ratings' weighted average rating factor. O/C--Overcollateralization. Data as of Sept. 1, 2021.|
- Default Rates Fall And The June Tally Hits A Four-Year Low, Sept. 3, 2021
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 2.5% By June 2022, Aug. 20, 2021
- U.S. Distress Ratio Rose Slightly To 2.6% After 16-Month Decline, Aug. 5, 2021
- U.S. CLO And Leveraged Finance Quarterly Key Themes, July 30, 2021
- About 90% Of 2021 Corporate Defaults Are From 'CCC+' Or Lower-Rated Entities, June 26, 2021
- The U.S. Distress Ratio Fell To 2.6% In May, June 14, 2021
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 4% By March 2022, May 26, 2021
- U.S. CLO And Leveraged Finance Quarterly Key Themes, May 20, 2021
- Credit Markets Update North America Q2 2021, March 30, 2021
This report does not constitute a rating action.
|Credit Markets Research:||Nicole Serino, New York + 1 (212) 438 1396;|
|Leveraged Finance:||Robert E Schulz, CFA, New York + 1 (212) 438 7808;|
|Ramki Muthukrishnan, New York + 1 (212) 438 1384;|
|Secondary Contact:||Daniel Hu, FRM, New York + 1 (212) 438 2206;|
|Research Assistant:||Abinash Meher, Pune|
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