- There were 21 rated corporate defaults globally in second-quarter 2022 (accounting for $28.5 billion in outstanding debt), up from 13 defaults ($8.6 billion) in first-quarter 2022 and 20 defaults ($12.9 billion) in second-quarter 2021.
- Despite few defaults, market sentiment has soured in 2022: global speculative-grade issuance is down 73% in 2022, to $62.7 billion, while spreads have also widened dramatically in the second quarter in the U.S. and Europe.
- The consumer services sector led with five defaults, followed by leisure time/media and real estate, with three each.
- Credit quality remains positive as upgrades outnumbered downgrades in the second quarter despite the global total of 'AAA' ratings falling to seven from eight.
Globally, 21 companies rated by S&P Global Ratings as of April 1, 2022, defaulted by the end of the second quarter, up from 13 in the first quarter of 2022 and 20 in the second quarter of 2021. The default tally in the U.S. region (including tax havens) rose to 10 (from seven in the first quarter), representing 48% of all defaults for the quarter. Emerging markets accounted for six defaults (29%), up from five, and Europe saw five defaults, up from zero in the previous quarter. The global default rate for the second quarter was 0.29%, up from 0.18% in the first quarter of 2022 (see table 1).
|Quarterly Global Corporate Default Summary|
|Quarter||Total defaults*||Investment grade defaults||Speculative grade defaults||Default rate (%)||Investment grade default rate (%)||Speculative grade default rate (%)||Total debt defaulting (bil. $)|
|*Includes companies that were were not rated at the start of the year in which they defaulted. Data as of June 30, 2022. Source: S&P Global Ratings Research.|
Recent Defaults Are Lower Than The Historical Average
The most recent 12-month static pool, consisting of ratings observed on July 1, 2021, shows a default distribution that is consistent with our historical observations, for the most part. Of the 'CCC'/'C' ratings on July. 1, 2021, only 9.1% defaulted by June 30, 2022, much lower than the long-term weighted average of 26.1% annually. Meanwhile, 0.7% of 'B' ratings defaulted, lower than the 3.2% annual rate, and 0.2% of 'BB' ratings defaulted, lower than the 0.6% annual average.
|Descriptive Statistics On One-Year Global Default Rates|
|Most recent 12-month static pool (7/01/2021)||0.0||0.0||0.0||0.0||0.2||0.7||9.1|
|Weighted long-term average||0.0||0.0||0.0||0.1||0.6||3.2||26.1|
|Difference between last four quarters and average||0.0||(0.0)||(0.0)||(0.1)||(0.4)||(2.5)||(17.0)|
|No. of standard deviations||(0.3)||(0.5)||(0.6)||(0.4)||(0.7)||(1.6)|
|2008 default rates||0.0||0.4||0.4||0.5||0.8||4.1||27.3|
|Data through June 30, 2022. Source: S&P Global Ratings Research.|
The U.S. and tax havens accounted for 10 of the 21 rated defaults in the second quarter (see chart 1), as well as about 93% of defaulting debt (see chart 2). The 10 U.S. rated defaults were up from seven in the first quarter and the same as in the second quarter of 2021. Emerging markets had six defaults, Europe had five, and other developed countries (Australia, Canada, Japan, and New Zealand) had zero (see chart 3).
The consumer services sector had the most rated defaults in the second quarter, with five (see table 3). There were four large defaults in the second quarter (with a rated debt amount over $1 billion), including Talen Energy Supply LLC ($9.027 billion), Envision Healthcare Corp. ($7.370 billion), Rite Aid Corp. ($3.244 billion), and Revlon Inc. ($2.750 billion). Together, these companies represent 86% of all defaulting debt in the second quarter.
Most of the default activity in the second quarter was in April, with 10, followed by three each in May and June.
|Global Defaults: Second Quarter 2022|
|Default date||Company||Country||Industry||Rated debt amount (mil. US$)||Default type|
|4/1/2022||Ruby Pipeline LLC||U.S.||Energy and natural resources||825.0||Missed principal|
|4/7/2022||Owl Finance Ltd. (Hibu Group Ltd.)||U.K.||Leisure time/media||293.8||Distressed exchange|
|4/7/2022||PSS Industrial Group Corp.||U.S.||Consumer/service sector||350.0||Missed principal/interest|
Guangzhou R&F Properties Co. Ltd.
|China||Real estate||0.0||Distressed exchange|
Kernel Holding S.A.
|Ukraine||Consumer/service sector||600.0||Missed principal|
Promotora de Informaciones S.A.
|Spain||Leisure time/media||0.0||Distressed exchange|
Dunn Paper Holdings Inc.
|U.S.||Aerospace/automotive/capital goods/metal||380.0||Missed interest|
|4/12/2022||Grupo Kaltex, S.A. de C.V.||Mexico||Consumer/service sector||320.0||Missed principal|
|4/12/2022||Petropavlovsk PLC||U.K.||Energy and natural resources||500.0||Missed interest|
|4/14/2022||EuroChem Group AG||Switzerland||Health care/chemicals||0.0||Missed interest|
|5/3/2022||Envision Healthcare Corp. (Envision Healthcare Holdings Inc.)||U.S.||Health care/chemicals||7,369.8||Distressed exchange|
|5/6/2022||Safari Beteiligungs Gmbh (Dice Midco Sarl)||Germany||Leisure time/media||370.1||Distressed exchange|
|5/10/2022||Talen Energy Supply LLC (Talen Energy Corp.)||U.S.||Utilities||9,026.8||Chapter 11|
|6/16/2022||Revlon Inc.||U.S.||Consumer/service sector||2,750.0||Chapter 11|
Greenland Holding Group Co. Ltd.
|China||Real estate||0.0||Distressed exchange|
Rite Aid Corp.
|U.S.||Consumer/service sector||3,244.0||Distressed exchange|
|*Excludes confidential defaults. Data through June 30, 2022. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
Regional And Sector Default Trends
Trailing-three-month default rates provide a more current picture of default trends than our trailing-12-month rates because the trailing-three-month default rates are not unduly influenced by more distant periods of unusual calm or stress in corporate credit markets. Globally, the trailing-three-month speculative-grade default rate rose to 0.57% as of June 30, 2022, from 0.35% at the end of the first quarter of 2022 (see chart 4). The U.S. default rate rose to 0.52% from 0.36%, the European default rate rose to 0.63% from zero, and the emerging markets default rate rose to 0.78% from 0.65%.
The global trailing-12-month speculative-grade default rate was 1.43% as of June 30, 2022, up slightly from 1.41% at the end of the first quarter (see chart 5). The U.S. trailing-12-month default rate rose slightly to 1.43% from 1.40%, the European rate rose to 0.92% from 0.69%, and the emerging markets rate rose to 2.06% from 1.98%.
Looking at a specific breakout for energy and natural resources both in the U.S. and excluding U.S., we can see that this sector has been the main driver of defaults for periods of high and low default activity (see chart 6). The U.S. energy and natural resources' 12-month default rate fell to 2.29% from 2.92% at the end of March 2022, and from its most recent high of 22.6% in February 2021. Outside the U.S., the energy and natural resources default rate fell to 1.41% from 1.53% at the end of March and from a recent high of 11.61% from February 2021. The non-energy and natural resources default rates are lower than that of energy and natural resources, with the U.S. rate up slightly to 1.35% from 1.25%. The most recent high was 5.43% in September 2020, and the rate outside of the U.S. rose to 1.44% from 1.4%, also down from a recent high of 3.87% from March 2021.
Upgrades Lead Downgrades For Five Of The Last Six Quarters
The prolonged stretch of global upgrades outnumbering downgrades continued in the second quarter. Outside of the first quarter of this year, credit quality has trended positive since the end of the period of downgrades in 2020 at the start of the pandemic. And the first quarter's downgrades were largely driven by the quick and numerous downgrades of Russian entities, or those most directly affected by the conflict with Ukraine.
The proportion of upgrades among all ratings rose to 3.1% in the second quarter of 2022 from 2.2% in the first quarter, and downgrades fell to 1.8% from 2.8% (see table 4). The quarterly default rate rose to 0.28% from 0.18%, the percentage of unchanged ratings fell to 92.1% from 92.34, and the ratio of downgrades to upgrades fell to 0.6% from 1.3%. (A ratio of 1.00% would indicate that the number of downgrades was equal to the number of upgrades.) The past four quarters have averaged 2.7% upgrades, up from 2.1%, and downgrades fell to 1.8% compared with 2.4%. Defaults have fallen to 0.2% in the past four quarters, compared with 0.5% over the preceding four.
|Quarterly Global Corporate Rating Actions Summary|
|Quarter||Issuers||Upgrades (%)||Downgrades¶ (%)||Defaults (%)||Withdrawn ratings (%)||Changed ratings (%)||Unchanged ratings (%)||Downgrade/upgrade ratio|
|This table compares the net change in ratings from the first to the last day of each quarter. All intermediate ratings are disregarded. ¶Excludes downgrades to 'D', shown separately in the defaults column. Data as of June 30, 2022. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
Large downgrades (those of six notches or more, not including defaults) had been rare in recent years and were down from the highs of the financial crisis (see chart 7). However, in the first quarter of 2022, prior to S&P Global Ratings' decision to suspend all ratings based in Russia, we lowered an unprecedented number of Russian ratings. Of the 67 large rating actions in the first quarter, approximately 80% were on Russian entities.
Of the eight 'AAA' rated companies on July 1, 2021, seven were still rated 'AAA' at the end of the second quarter of 2022 (see table 5). Singapore Technologies Engineering Ltd. was downgraded to 'AA+' following the debt-funded acquisition of TransCore. In the past 12 months, 65 companies were upgraded to investment grade (rated 'BBB-' or higher) from speculative grade (rated 'BB+' or lower), up from 22 companies in the previous 12 months. And 25 companies were downgraded to speculative grade from investment grade in the past 12 months, down from 51 companies in the previous 12 months.
|Trailing Four-Quarter Transition Rates By Region (Third-Quarter 2021 To Second-Quarter 2022|
|Emerging and frontier markets|
|Data as of June 30, 2022. Source: S&P Global Ratings Research; S&P Global CreditPro®.|
|Global Average One-Year Transition Rates, 1981 To 2021|
|From / To (%)||AAA||AA||A||BBB||BB||B||CCC/C||D||NR|
|Data as of June 30, 2022. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
Ratings Performance Holds Through The Second Quarter
The Gini ratio, a quantitative measure of the rank-ordering power of a rating system over a given time horizon, shows an annual global Gini coefficient of 82.6% at one year, 75.4% at three years, 71.6% at five years, and 69.1% at seven years (see table 7). If the rank ordering of corporate ratings only randomly approximated default risk, the Gini coefficient would be zero. Alternatively, if corporate ratings were perfectly rank ordered so that all defaults in each time frame occurred only among the lowest-rated entities, the curve would capture all of the area on the graph above the diagonal, and the Gini coefficient would be 100% (see Appendix).
|Gini Coefficients By Region|
|U.S. and tax havens||80.6||72.9||69.1||66.5|
|*Europe refers to Austria, Belgium, British Virgin Islands, Bulgaria, Channel Islands, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, U.K., Republic of Moldova, and Slovak Republic. Data as of June 30, 2022. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
The data we collected from the pool of global defaulters indicate that speculative-grade defaults tend to occur in the third year after an initial rating assignment, particularly in the 'BB' and 'B' rating categories (see chart 8). For example, among defaulters that S&P Global Ratings initially rated 'B', the default rate climbed to a high of 18.2% in the first three years before decreasing in the following years. Defaulted issuers rated 'BB' at origination showed a similar pattern, but they peaked a little later--typically in the fourth year. Conversely, for defaulting entities that were initially rated 'CCC', we observed the highest default rate in the first year--not surprising, given their weaker credit profiles.
For nonfinancial entities, the path to default in the seven years prior is typically gradual (see chart 9). As with the industrial companies that defaulted during the trailing 12 quarters, the median ratings on financial companies were consistently lower in the seven years leading up to default than the long term (Jan. 1, 1981 to June 30, 2021) median ratings. While S&P Global Ratings tends to take more rating actions on defaulting financial companies than on their counterparts in the industrial sector, the frequency of defaults in the financial sector is much lower. In the past 12 quarters, 24 financial institutions or insurance companies defaulted, whereas 344 nonfinancial companies defaulted. (In charts 9 and 10, we do not include rating withdrawals.)
The rating paths of defaulters over the trailing 12 quarters vary depending on the sector. The median ratings on financial institutions and insurance companies that defaulted were higher roughly five to seven years before default. After that point, the median ratings fell abruptly to considerably below their long-term levels (see chart 10). Prior to defaulting, financial companies tend to experience a sudden loss of investor confidence, which causes them to default more quickly than their higher-rated counterparts in the industrial sector. However, many of the issuers included in the defaulting cohort from the past 12 quarters were downgraded to speculative grade during the financial crisis in 2008 (or shortly thereafter).
The average time to default (from the date of original rating) for the 23 defaulted issuers in the second quarter of 2022 (including those that were not rated at the start of the quarter) was 4.5 years, much lower than the historical average of 5.9 years. There were three defaults in this quarter where the issuers were initially rated investment grade ('BBB'), while two were originally rated in the 'BB' category, and nine each for 'B' and 'CCC/C'.
There is a generally negative relationship between the initial rating on a defaulting issuer and the time to default (see table 8). For the entire pool of defaulters (January 1981 to June 2022), the average times to default for issuers that were originally rated in the 'A' and 'B' rating categories were 14.2 years and 5.1 years, respectively, from the time of initial rating (or from Dec. 31, 1980, for published ratings that were current at the start date of the study regardless of actual rating date). For issuers rated in the 'CCC'/'C' category, the average time to default was only 2.1 years.
In cases where an entity emerged from a previous default (including distressed exchanges), we treated the reemergence as a separate entity and designated the original rating as the first rating after the default event. (The "range" column in table 8 shows the difference between each rating category's minimum and maximum time to default.)
|Time To Default From Original Rating For Global Corporate Defaulters, 1981-June 30, 2022|
|Original rating||Defaults||Average years from original rating*||Median years from original rating||Standard deviation of years from original rating||Range|
|Range is the difference between each rating category's minimum and maximum time to default. *Or Dec. 31, 1980, whichever is later. NR--Not rated. N/A--Not available. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
Tracking the time to default from subsequent ratings further supports this negative relationship between rating quality and default remoteness (see table 9). However, for the most part, times to default from subsequent ratings are shorter than those for initial ratings. This is largely a result of rating changes, particularly downgrades. As an issuer approaches default, it typically experiences several rating changes in a short amount of time.
|Time To Default From Post-Original Rating For Global Corporate Defaulters, 1981-June 30, 2022|
|Rating path to default||Average years from rating category||Median years from rating category||Standard deviation of years from rating category|
|NR--Not rated. N/A--Not available. Sources: S&P Global Ratings Research and S&P Global CreditPro®.|
Speculative-Grade Bond Issuance Rises Slightly, Maintaining Strong 2021 Totals
New speculative-grade issuance in the U.S. fell to $22.8 billion in the second quarter of 2022 from $39.9 billion in the first quarter of 2022--down massively from the $116.1 and $113.5 billion in issuance in the first two quarters of 2021. Issuers rated 'BB' had $12.2 billion in new issuance, down from $14.9 billion ($50.3 billion and $55.6 billion in first- and second-quarter 2021, respectively); 'B' rated issuers had $6.5 billion, down from $16.2 billion ($51.2 billion and $44.4 billion); and 'CCC' rated issuers had $4.1 billion, down from $8.8 billion ($14.6 billion and $13.5 billion) (see chart 11). Issuance has trailed the past two years by a significant margin, but the weak pace of 2022 has kept nonfinancial corporate issuance lower than comparable year-to-date levels over the past 10 years.
Corporate bond spreads were dramatically wider in the second quarter. At the end of June 2022, 'BB' rated spreads were up to 434 basis points (bps) from 270 bps at the end of March; 'B' rated spreads were up to 616 bps from 403 bps; and 'CCC' rated spreads were up to 1,039 bps from 656 bps. Spreads have fallen somewhat since as markets began anticipating that the Fed may slow down or even hold off on further rate hikes. However, more recent language from the central bank indicates its intention to continue raising interest rates to stamp out inflation, even if coming at the cost of triggering a recession.
Defaults Are Expected To Rise In The U.S.
Our baseline forecast is for a forward-12-month (through June 2023) U.S. speculative-grade corporate default rate of 3.5% (see chart 12). To realize our mean baseline projection, a total of 65 speculative-grade issuers would need to default between July 2022 and June 2023. We expect defaults to increase over the next 12 months as rising interest rates and inflation start to cut into corporate profits and consumer sentiment. This also comes on the heels of what is becoming a more likely recession as time goes on--currently our economists put a 45% likelihood of a recession in the U.S. over the next 12 months, meaning recession is likely.
We determine our forecast based on a variety of factors, including our proprietary default model for the U.S. speculative-grade corporate bond market. The main components of the model include economic variables, such as the unemployment rate; financial variables, such as corporate profits, the Fed's Senior Loan Officer Opinion Survey On Bank Lending Practices, the interest burden, and the slope of the yield curve; and credit-related variables, such as negative bias (the proportion of entities with negative outlooks or ratings on CreditWatch negative).
The interaction between the U.S. speculative-grade default rate and the input variables is in line with our expectations. For instance, increases in the unemployment rate and negative bias positively correlate with the speculative-grade default rate, which means that as the unemployment rate or negative bias increases, so does the default rate. We update our forecast for the U.S. corporate speculative-grade default rate each quarter after analyzing the latest economic data and expectations.
These default projections are consistent with S&P Global economists' projections. In addition to the baseline, we have one pessimistic scenario and one optimistic scenario. The pessimistic scenario yields a mean 12-month projection of 6.0%--a total of 113 issuers would need to default in the next 12 months to realize our pessimistic scenario. The optimistic scenario yields a mean 12-month projection of 1.75%, meaning 33 issuers would have to default in the next 12 months.
Appendix: Gini Methodology
To measure ratings performance, or ratings accuracy, we plot the cumulative share of issuers by rating against the cumulative share of defaulters in a Lorenz curve to show the accuracy of its rank ordering. Max O. Lorenz developed the Lorenz curve as a graphical representation of the proportionality of a distribution.
To build the Lorenz curve, we order the observations from the low end of the ratings scale ('CC') to the high end ('AAA'). If the rank ordering of S&P Global Ratings' corporate ratings only randomly approximated default risk, the curve would fall along the diagonal. Thus, the Gini coefficient (a summary statistic of the Lorenz curve) would be zero. If corporate ratings were perfectly rank ordered so that all defaults occurred only among the lowest-rated entities, the curve would capture all of the area above the diagonal on the graph, and the Gini coefficient would be 100% (see chart 12). To calculate Gini coefficients, we divide area B by the total of area A plus area B to capture the extent to which actual ratings accuracy diverges from a random scenario.
For definitions of the terms and calculations that we use in this report, see Appendix I in "AcceptAllChangesInDocAndStopTracking "2021 Annual Global Corporate Default And Rating Transition Study"," published April 13, 2022.
This report does not constitute a rating action.
|Ratings Performance Analytics:||Nick W Kraemer, FRM, New York + 1 (212) 438 1698;|
|Zev R Gurwitz, New York + 1 (212) 438 7128;|
|Research Contributors:||Nivritti Mishra Richhariya, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
|Yogesh Kumar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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