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Default, Transition, and Recovery: Distressed Debt Amount Falls By Over 70%

Distress Ratios And Distress Volumes Continue To Fall

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 bps relative to U.S. Treasuries--dipped to 2.3% as of Oct. 19, 2021, from 2.6% in the previous month. The insurance, aerospace and defense, and utilities (largely midstream energy companies) sectors have the highest distress ratios (see table 1). The overall number of distressed issues is very low. As the distress ratio has continued declining, the amount of distressed debt in the U.S. has shrunk by nearly 70% over the last 12 months. Reductions in the oil and gas sector ($20 billion) and media and entertainment sector ($10 billion) have contributed to the decline (see chart 1). Both sectors were heavily impacted by the pandemic and the sudden drop in oil prices in 2020, but they have benefited from accommodative debt capital markets and the steady recovery of the U.S. economy.

Chart 1

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Chart 2

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Table 1

Media And Entertainment (Largely Lodging and Leisure) Leads By Total Distressed Debt Affected
Distressed ratio* (%) Debt-based distressed ratio (%) Number of distressed issues Total debt affected (mil. $) Percent change of distressed credits by sector
Aerospace & defense 8.60 8.10 3 2,060 0.0
Automotive 4.30 4.50 3 1,950 0.0
Banks and brokers
Capital goods 1.50 1.50 1 515 0.0
Chemicals, packaging & environmental services 1.80 2.30 2 1,380 0.0
Consumer products 0.60 0.40 1 450 0.0
Financial institutions 1.00 0.90 3 684 0.0
Forest products & building materials
Health care 2.90 2.50 3 2,241 200.0
High technology 2.20 0.70 2 384 0.0
Homebuilders/real estate co. 3.80 2.20 3 690 0.0
Insurance 5.60 2.90 2 550 0.0
Media & entertainment 2.80 4.00 9 8,569 (18.2)
Metals, mining & steel
Oil & gas 2.10 1.40 4 1,299 (42.9)
Retail/restaurants 2.40 1.20 3 683 (25.0)
Telecommunications 2.60 1.20 3 1,500 0.0
Transportation
Utilities (midstream energy) 4.00 2.30 9 3,093 (25.0)
Total 2.31 2.07 51 26,048 (0.32)
Data as of Oct. 19, 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. **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. 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. Source: S&P Global Ratings Research.

Headwinds Remain Despite Positive Trends

Despite the positive trends, risks remain as the amount of U.S. corporate debt rated 'B-' or lower remains very high at nearly $234 billion. This is higher than its five-year average of $225 billion (see chart 3) as inflation and supply chain disruptions are posing a risk to issuers' profit margins. This is especially the case for the sectors most exposed to shipping, where supply shortages have become more severe and where we expect supply-demand imbalances to extend well into 2022 (see "Global Credit Conditions Q4 2021: Supply Chain Strain, Inflation Pain," Sept. 29, 2021). However, funding conditions remain highly supportive with spreads on corporate debt remaining largely stable. U.S. secondary market spreads across 'B' and 'CCC' rating categories narrowed in September to 373 bps and 589 bps from 385 bps and 598 bps at the end of September 2021 (see chart 4).

Chart 3

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Chart 4

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Table 2

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.

3 2,059.50 CCC+ Negative
Automotive

Ford Motor Co.

2 1,550.00 BB+ Negative

Cooper-Standard Automotive Inc.

Yes 1 400.00 B- Negative
Capital goods

Aptim Corp.

1 515.00 CCC+ Stable
Chemicals, packaging and environmental services

Cornerstone Chemical Co.

1 450.00 CCC+ Negative

TPC Group Inc.

1 930.00 CCC Negative
Consumer products

Revlon Consumer Products Corp.

1 450.00 CCC- Negative
Financial institutions

BrightSphere Investment Group Inc.

1 125.00 BB+ Stable

CNG Holdings Inc.

1 259.00 B- Stable

Navient Corp.

1 300.00 BB- Stable
Health care

Air Methods Corp.

1 500.00 B- Stable

Envision Healthcare Corp.

1 1,026.45 CCC+ Negative

Tennessee Merger Sub Inc.

Yes 1 714.41 B- Negative
High technology

Pitney Bowes Inc.

1 375.00 BB Stable

Riverbed Technology Inc.

1 9.46 CC Negative
Homebuilders/real estate companies

Diversified Healthcare Trust

2 600.00 BB- Negative

K. Hovnanian Enterprises Inc.

Yes 1 90.00 CCC+ Positive
Insurance

Assurant Inc.

1 250.00 BBB Stable

Unum Group

1 300.00 BBB Stable
Media and entertainment

AMC Entertainment Holdings Inc.

3 1,646.32 CCC+ Positive

AMC Entertainment Inc.

Yes 1 98.32 CCC+ Positive

Diamond Sports Group LLC

3 4,824.80 CCC+ Negative

Exela Intermediate Co. LLC

Yes 1 1,000.00 CCC- Negative

Staples Inc.

1 1,000.00 B Negative
Oil and gas

Global Marine Inc.

Yes 1 261.22 CCC Negative

Great Western Petroleum LLC

1 235.00 B- Stable

KLX Energy Services Holdings Inc.

1 250.00 CCC+ Stable

W&T Offshore Inc.

1 552.46 CCC+ Negative
Retail/restaurants

Party City Holdings Inc.

1 22.92 CCC+ Positive

QVC Inc.

2 660.00 BB- Stable
Telecommunications

United States Cellular Corp.

3 1,500.00 BB Stable
Utilities

CSI Compressco LP

1 155.00 B- Stable

PBF Finance Corp.

Yes 3 1,724.99 BB- Negative

Talen Energy Supply LLC

5 1,213.41 B- Stable
Data as of Oct. 19, 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 Contributors:Lyndon Fernandes, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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