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Credit Trends: Risky Credits: Defaults Drive Drop In North American Risky Credits

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of May 22, 2024

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Default, Transition, and Recovery: The European Speculative-Grade Default Rate Should Level Out At 3.75% By March 2025

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CreditWeek: How Are Funds Using Net Asset Value Loans?

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Default, Transition, and Recovery: Resilient Growth, Resilient Yields, And Resilient Defaults To Bring The U.S. Speculative-Grade Corporate Default Rate To 4.5% By March 2025


Credit Trends: Risky Credits: Defaults Drive Drop In North American Risky Credits

(Editor's Note: Our "Risky Credits" series focuses on U.S. and Canadian 'CCC' category rated corporate issuers, as well as issuers rated 'B-,' because most defaults are typically by issuers rated in the 'CCC' category or rated 'B-' with a negative outlook or on CreditWatch negative.)

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Highlights

Risky credits in North America fell by 8.2% in the first quarter of 2024--its largest quarterly drop in two years.   Despite the positive downward trend in risky credits, many of the removals were because there was a larger number of U.S. defaults in the first quarter, which contributed to 42% of total risky credit removals.

Chart 1

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Chart 2

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The number of issuers downgraded into the 'CCC+' and below rating category outpaced the number of issuers upgraded out of the category by 10 to four.   Health care led downgrades with three and the high tech and media sectors had two each. The media and entertainment sector also led upgrades out of the 'CCC+' and below rating category in the first quarter, including print-based customer service provider Vericast Corp. and fitness solution provider Patchell Holdings Inc. to 'B-' after improving their cash and operating performance.

Chart 3

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Speculative-grade issuance rose in the first quarter, fueled by rising investor risk appetite.   First-quarter year-to-date 2024 speculative-grade bond issuance increased by 63% and 84% from first quarter 2023 and 2022, respectively. Even some issuers at the lowest end of the credit spectrum were able to tap into markets as 'CCC+' and below year-to-date bond issuance volumes increased to $2 billion in the first quarter of 2024, from $1.5 billion in the fourth quarter of 2023. However, most of the issuance the first quarter came from the 'B' and 'BB-' rating categories, accounting for 24% and 22% of total speculative-grade issuance, respectively.

Chart 4

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More than 55% of 'CCC+' and below rated issuers reported leverage over 10x and EBITDA interest coverage deficits. Despite a modest decline in the number of 'CC+' and below rated issuers with reported leverage over 10x, the higher interest rates caused a spike in the number of issuers reporting interest coverage deficits and free cash flow shortfalls.

Chart 5

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Our analysts forecast that improving performance and declining rates could result in reported leverage falling more than 2x.  Additionally, S&P Global Ratings' forecasts suggest that the percentage of 'CCC+' and below rated issuers with reported interest coverage deficits could fall below 50% by year-end 2024. However, our expectations for a healthy rebound continues to moderate.

Chart 6

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U.S. BSL CLOs at least partially exposed to downgrade of Altice Europe N.V.  Since the start of the year, a handful of widely held U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) obligors have had downgrades. A large majority of U.S. BSL CLOs have at least some exposure to parent issuer Altice Europe N.V.; on average, based on the most recent reports we have available to us, the company represents 0.8% of U.S. BSL CLO assets. Following the downgrades of Altice Europe N.V.'s subsidiaries, Altice France and Numericable, on March 28, 2024, the average U.S. BSL CLO 'CCC' bucket across reinvesting transactions increased to 7.18% from 6.24% in March, before increasing further to 7.27% by April 22. Most reinvesting BSL CLOs are still below their 7.5% 'CCC' threshold.

Table 1

BSL CLO index metrics (CLO insights 2024 U.S. BSL index)
BSL 'B-' bucket (%) 'CCC' bucket (%) CreditWatch negative (%) Outlook negative (%)
Jan. 31, 2024 26.27 6.67 0.34 18.27
Feb. 29, 2024 26.64 6.24 0.51 16.89
Mar. 31, 2024 26.42 7.18 0.65 16.44
Apr. 22, 2024 25.93 7.27 0.91 16.83
BSL--Broadly syndicated loan. CLO--Collateralized loan obligation. Source: S&P Global Ratings.

Table 2

Upgrades from 'CCC' category beginning 2024
Rating date Issuer Country Sector Rating to Rating from Debt (Mil. USD)
Jan. 26, 2024

Artera Services LLC

U.S. Capital goods B- CCC+ 5,432
Mar. 21, 2024

Vericast Corp.

U.S. Media and entertainment B- CCC 2,743
Mar. 14, 2024

Patchell Holdings Inc.

Canada Media and entertainment B- CCC+ 463
Mar. 05, 2024

KAMC Holdings Inc.

U.S. Consumer products B- CCC+ 445
Data as of March 31, 2024. Source: S&P Global Credit Research & Insights.

Table 3

Downgrades into the 'CCC' category beginning 2024
Rating date Issuer Country Sector Rating to Rating from Debt (Mil. USD)
Mar. 01, 2024

iHeartMedia Inc.

United States Media and entertainment CCC+ B 6,051
Jan. 12, 2024

GoTo Group Inc.

United States High technology CCC+ B- 3,000
Mar. 11, 2024

WW International Inc.

United States Consumer products CCC+ B- 1,500
Jan. 04, 2024

Hughes Satellite Systems Corporation (EchoStar Corporation)

United States Telecommunications CCC+ BB 1,500
Jan. 16, 2024

Baffinland Iron Mines Corp.

Canada Metals, mining, and steel CCC B- 1,150
Feb. 27, 2024

Cumulus Media Inc.

United States Media and entertainment CC B- 1,025
Feb. 06, 2024

Pluto Acquisition I Inc.

United States Health care CC B- 873
Mar. 15, 2024

American Rock Salt Co. LLC

United States Metals, mining, and steel CCC+ B- 600
Mar. 26, 2024

Sandvine LP

Canada High technology CCC B- 510
Mar. 12, 2024

Emergent BioSolutions Inc.

United States Health care CCC+ B- 450
Data as of March 31, 2024. Source: S&P Global Credit Research & Insights.

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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
Secondary Contacts:Patrick Drury Byrne, Dublin (00353) 1 568 0605;
patrick.drurybyrne@spglobal.com
Ramki Muthukrishnan, New York + 1 (212) 438 1384;
ramki.muthukrishnan@spglobal.com
Minesh Patel, CFA, New York + 1 (212) 438 6410;
minesh.patel@spglobal.com
Daniel Hu, FRM, New York + 1 (212) 438 2206;
daniel.hu@spglobal.com
Research Contributor:Vaishali Singh, Pune;
vaishali.singh2@spglobal.com

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