Downgrades into the 'CCC' rating category increased to 19 in the second quarter from 10 in the first quarter among U.S. and Canadian corporate issuers rated by S&P Global Ratings.  The consumer products and health care sectors led with four each. Higher interest rates and inflation have caused U.S. income growth to lag spending since around the middle of 2023, affecting many lower-rated issuers. For consumer product issuers in particular, excess savings built over the past few years are now depleted as margins come under pressure (see "Industry Credit Outlook Update North America: Consumer Products," July 18, 2024).

In the health care sector, although demand has stabilized, EBITDA margin pressure and heightened interest expense have hurt some companies' free cash flow (see "Industry Credit Outlook Update North America: Health Care," July 19, 2024). Even with the historically high number of health care defaults so far in 2024, the sector maintains the highest potential for further downgrades or defaults by debt volume, with $76.4 billion in debt outstanding from companies assigned negative rating outlooks or CreditWatch implications.

Meanwhile, the total number of U.S. and Canadian companies rated in the 'CCC' category fell for the second consecutive quarter, to 161 from 168.  Although this number is below the five-year average of 173, nearly 60% of this quarter's decrease owed to either defaults or withdrawn ratings, and 70% of the 161 total are still assigned either negative rating outlooks or CreditWatch implications, meaning they are at risk for downgrades or defaults.

Additionally, debt rated 'CCC+' and below rose to $343 billion in June from $294 billion in March--a 17% increase.  However, much of the increase can be attributed to a single issuer, Lumen Technologies, that was rated 'CCC+' after selectively defaulting in March.

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Refinancing Risk Decreases

Strong investor demand in the first half of 2024 has allowed speculative-grade companies to refinance upcoming debt, lowering refinancing risk.  Issuance of debt rated 'CCC+' or lower nearly doubled to $4.1 billion through June this year from $2.3 billion in the first half of 2023. Issuance is higher compared with this point last year across most speculative-grade ratings, with the greatest year-over-year increases coming from 'B+' and 'B' rated issuers. Most of the issuance this year has been for refinancing purposes.

Health care faces the most pronounced refinancing challenges, with nearly $10.1 billion in debt coming due over the next 12 months and an additional $15.4 billion coming due within the next 24 months.  For companies rated 'B-' and below overall, maturities seem manageable, peaking in 2028-2029, although issuers in this rating category will remain the most exposed to any downturn in primary market conditions.

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Credit Metrics Show Positive Trends

Reported leverage and EBITDA coverage for 'CCC+' and below showed positive trends in the first quarter of 2024.  However, nearly 55% of 'CCC+' and below rated issuers still show very weak credit measures (i.e., reported leverage over 10x and EBITDA interest coverage of less than 1x). The percentage of issuers with interest coverage deficits (less than 1x) remains sticky at 62%, likely resulting in liquidity risks remaining a key focus for the rating category in 2024.

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Among the five sectors with the highest percentages of 'CCC+' and below issuers with at least three quarters of consecutive reported EBIDTA declines, health care and consumer products each experienced drops from the previous quarter, to 6% and 4% in the first quarter of 2024, respectively, from 14% and 8% in the fourth quarter of 2023. Meanwhile, 'CCC+' and below issuers in the media, entertainment, and leisure sector and the restaurants and retail sector experienced increasing percentages of issuers with EBITDA growth challenges in the first quarter. Furthermore, about half of issuers in those two sectors have very weak credit measures.

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CLO Metrics Improve

Downgrades in the second quarter kept 'CCC' buckets elevated across our index of reinvesting U.S. broadly syndicated loan (BSL) collateralized loan obligation (CLO) transactions.  Despite the downgrades, S&P Global Ratings' weighted average rating factor has improved over the past year, largely due to the decrease in CLO exposure to obligors rated 'B-' during this time. This partly reflects trends in the overall loan market but also likely results from CLO managers' de-risking efforts amid uncertain economic conditions.

As a result, there has been gradual par loss over the past year, and this, plus elevated 'CCC' baskets, has resulted in the average junior overcollateralization cushion across the transactions in our CLO index declining modestly, to just below 4%.

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Related Research

• Altice USA Inc. Downgraded To 'CCC+' On Capital Structure Sustainability Concerns; Outlook Negative, May 15, 2024
• Connect Holding II LLC Downgraded To 'CCC' From 'B-' On Potential Liquidity Shortfall, Outlook Negative, May 10, 2024
• Husky Technologies Ltd. Outlook Revised To Stable From Negative On Completed Refinancing; Ratings Affirmed, April 25, 2024
• Lumen Technologies Inc. Upgraded To 'CCC+' From 'SD'; Outlook Stable; Debt Rating Actions Taken, April 9, 2024