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Credit Trends: Risky Credits: Risks Increase For North American 'CCC' And Below Issuers

COMMENTS

Default, Transition, and Recovery: Global Weakest Links Fall To Their Lowest Level Since April 2019

COMMENTS

Default, Transition, and Recovery: R&F Properties Becomes The First Emerging Markets Default Of 2022

COMMENTS

Credit Trends: Risky Credits: Bright Outlook For North American 'CCC' Issuers After Falling Over 40% In 2021

COMMENTS

Default, Transition, and Recovery: Slower Start To 2022 As ION Geophysical Corp. Becomes First Default Of The Year


Credit Trends: Risky Credits: Risks Increase For North American 'CCC' And Below Issuers

(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 typically from issuers rated in the 'CCC' category, these and 'B-' rated companies with negative outlooks or ratings on CreditWatch negative require close monitoring.)

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On This Month's Front Burner

'CCC' issuance is 1.63x 2020 year-to-date levels.   Despite slowing over the last two months, bond issuance levels remained strong in November for the lower rating categories compared to the same period last year as U.S. speculative-grade bond and loan issuance topped $1 trillion for the first time. However, issuance is now slowing as investors become more cautious with the emergence of the omicron variant of COVID-19 and the likelihood that the Fed may move faster in terms of tapering and raising rates to counter persistent inflation. Nonetheless, issuance in the 'CCC' rating category remains 60% higher than at the point last year as investors' hunt for yield pushed speculative-grade bond, leveraged loan, and collateralized loan obligation totals to multiyear and in some cases record-breaking first-half totals in 2021 (see "Global Financing Conditions: Bond Issuance Is Expected To Finish The Year Close To 2020 Levels; Drop 2% Next Year," Oct. 25, 2021).

Spreads are beginning to rise from tight levels.  U.S. 'CCC' and 'B' composite spreads were largely steady in the third quarter but have risen sharply so far in the fourth quarter. 'CCC' spreads have increased to 647 basis points (bps) in November from 621 bps as of Aug. 31, and the 'B' spread has increased to 420 bps from 404 bps in the same time period, in tandem with slowing issuance. The recent rise in spreads is likely due to increasing investor caution due to a more uncertain and volatile outlook, given the emergence of the omicron variant and the possibility that the Fed may move faster in terms of tapering and raising rates.

Upgrades tie downgrades for the first time in 2021.   Rating actions into and out of the 'CCC' rating category slowed last month with only one upgrade and one downgrade since our last report. This includes the downgrade of U.S.-based medical device contract manufacturing organization Avalign Holdings Inc., whose operating performance has been significantly affected by ongoing supply chain and labor disruptions. For corporate borrowers in many sectors, supply constraints and/or labor shortages are expected to persist into the second half of 2022, which could hurt profit margins if companies are not able to pass prices through to consumers ( see "Credit Conditions: North America: As Recovery Rolls On, Inflation Risks Remain," Dec 1, 2021). By sector, consumer products has the highest 'CCC' exposure by issuer count, with 24 on negative bias and at risk for further downgrade or default.

Despite risks, credit trends remain positive for now.   The negative bias--issuers with a negative outlook or CreditWatch placement with negative implications--of 'CCC' rated issuers has declined to an all-time low of 61%. At the same time the positive bias--issuers with a positive outlook or CreditWatch placement with positive implications—has risen to 13% (its highest level since 2012) as we expect issuers to continue to be upgraded out of the 'CCC' rating category. The negative bias for 'B-' rated issuers has also dropped to its all-time low of 9% in November 2021.

The U.S. default rate continues to drop.   There were only nine defaults in the region from July to October. With these defaults, the North American total so far in 2021 is 37, less than a third of last year's year-to-date total of 135. The U.S. speculative grade default rate fell to 3.1% in July 2021 and is expected to fall to 2.5% by September 2022. (see "Two Defaults Brings The Corporate Tally To 67," Nov. 18, 2021 and "The U.S. Speculative-Grade Corporate Default Rate Could Reach 2.5% By September 2022," Nov. 16, 2021).

CLO credit metrics remain stable.   Upgrades for issuers with loans held across U.S. broadly syndicated loan collateralized loan obligations (CLOs) outnumbered downgrades for another month. CLO transaction junior overcollateralization test cushions reached a new high for the year, while exposure to defaulted issuers, issuers on CreditWatch with negative implications, and issuers with a negative rating outlook have all reached new lows for the year (see table 3).

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Table 1

Top 20 Rating Changes To 'CCC' From 'B-' By Debt Amount (Beginning 2021)
Rating date Issuer Country Sector Rating to Rating from Debt amount (mil. US$)
1/27/2021 Viking Cruises Ltd. (Viking Holdings Ltd) United States Media and entertainment CCC+ B- 3,225
5/25/2021 GEO Group (The) Inc. United States Consumer products CCC+ B 2,734
9/29/2021 Fantasia Holdings Group Co. Ltd. United States Homebuilders/real estate co. CCC B 1,950
4/1/2021 Epic Crude Services, LP United States Utility CCC+ B- 1,175
5/12/2021 WaterBridge Operating LLC (WaterBridge Resources, LLC) United States Utility CCC+ B- 1,000
4/9/2021 Ruby Pipeline LLC United States Utility CCC B- 825
8/31/2021 Zep Inc. United States Chemicals, packaging, and environmental services CCC+ B- 725
9/2/2021 U.S. TelePacific Holdings Corp. United States Telecommunications CCC+ B- 655
2/26/2021 Dawn Acquisitions LLC (Infra Colodata Holdings LLC) United States Telecommunications CCC B- 550
8/19/2021 JSG I Inc. United States Capital goods CCC+ B- 460
11/19/2021 Avalign Holdings, Inc. United States Health care CCC+ B- 458
4/16/2021 Cornerstone Chemical Co. United States Chemicals, packaging, and environmental services CCC+ B- 450
1/25/2021 PetroChoice Holdings, Inc. United States Consumer products CCC+ B- 435
6/17/2021 Salient CRGT, Inc. United States Aerospace and defense CCC B- 420
4/8/2021 BEP Ulterra Holdings, Inc. United States Oil and gas exploration and production CCC+ B- 415
9/8/2021 Dunn Paper Holdings Inc. United States Chemicals, packaging, and environmental services CCC+ B- 350
3/19/2021 MVK Intermediate Holdings, LLC United States Consumer products CCC+ B 335
5/11/2021 Overseas Shipholding Group Inc. United States Transportation CCC+ B- 325
Data as of Nov. 29, 2021. Source: S&P Global Ratings.

Table 2

Top 20 Rating Upgrades From 'CCC' Category (Beginning 2021)
Rating date Issuer Country Sector Rating to Rating from Debt amount (mil. US$)
10/22/2021 Finastra Ltd. United States High technology B- CCC+ 36,510
6/17/2021 Community Health Systems Inc. United States Health care B- CCC+ 17,382
4/29/2021 Endeavor Operating Company, LLC United States Media and entertainment B CCC+ 9,172
1/21/2021 NGL Energy Partners LP United States Utility B CCC+ 8,200
4/9/2021 First Quantum Minerals Ltd Canada Metals, mining, and steel B CCC+ 5,900
7/15/2021 Rite Aid Corp. United States Retail/restaurants B- CCC+ 4,069
4/15/2021 MEG Energy Corp. Canada Oil and 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. United States Retail/restaurants B- CCC+ 3,200
3/24/2021 SM Energy Company United States Oil and gas exploration and production B- CCC+ 2,747
2/10/2021 Cengage Learning Holdings II Inc. United States Media and entertainment B- CCC+ 2,555
7/14/2021 Callon Petroleum Co. United States Oil and gas exploration and production B- CCC+ 2,550
3/3/2021 Kenan Advantage Group Inc. United States Transportation B- CCC+ 2,398
3/16/2021 FXI Holdings, Inc. United States Chemicals, packaging, and environmental services B- CCC+ 2,075
9/28/2021 Gulf Finance, LLC United States Oil and gas exploration and production B- CCC+ 1,873
1/7/2021 Urban One, Inc. United States Media and entertainment B- CCC 1,872
6/3/2021 Heartland Dental, LLC (Hadrian Merger Sub Inc.) United States Health care B- CCC+ 1,810
3/31/2021 Priority Holdings, LLC (Priority Technology Holdings, Inc.) United States High technology B- CCC+ 1,777
3/29/2021 Vine Oil & Gas LP (Vine Energy Inc.) United States Oil and gas exploration and production B- CCC+ 1,760
2/18/2021 Mohegan Tribal Gaming Authority United States Media and entertainment B- CCC+ 1,696
Data as of Nov. 29, 2021. Source: S&P Global Ratings.

Table 3

BSL CLO Index Metrics (CLO Insights 2021 U.S. BSL Index)
(%) 'B-' bucket 'CCC' bucket Nonperform bucket CreditWatch Neg Outlook Neg
Jan-21 25.29 7.64 0.76 1.62 32.43
Feb-21 25.21 7.79 0.53 0.85 32.11
Mar-21 25.01 7.82 0.33 1.19 29.72
Apr-21 25.31 6.97 0.36 1.15 26.49
May-21 25.06 6.51 0.34 0.76 25.37
Jun-21 25.39 6.56 0.25 0.50 23.00
Jul-21 25.45 6.18 0.39 0.73 20.63
Aug-21 25.43 5.94 0.43 0.55 18.02
Sep-21 25.15 6.32 0.37 0.77 16.41
Oct-21 25.65 6.07 0.35 0.77 15.39
Nov-21 26.01 6.21 0.32 0.43 14.27
BSL CLO--Broadly syndicated loan collateralized loan obligation.

This report does not constitute a rating action.

Credit Markets Research:Nicole Serino, New York + 1 (212) 438 1396;
nicole.serino@spglobal.com
Leveraged Finance:Robert E Schulz, CFA, New York + 1 (212) 438 7808;
robert.schulz@spglobal.com
Ramki Muthukrishnan, New York + 1 (212) 438 1384;
ramki.muthukrishnan@spglobal.com
Secondary Contact:Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Research Contributor:Yogesh Kumar, Pune;
yogesh.kumar2@spglobal.com

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