In the seven-year Lorenz curve, speculative-grade issuers constituted 88.3% of defaulters and only 36.7% of the entire sample (see chart 29). Fourth quarter earnings releases have provided insight into corporate margin pressures, but labor market commentary signals that some of these headwinds may be abating. Issuer credit ratings can be either long-term or short-term. For example, if an entity was rated 'A' on Jan. 1, 2020, and was downgraded to 'BBB' in the middle of the year and then upgraded to 'A' later in the year (with no other subsequent rating changes), this entity would be included only in the percentage of issuers that began the year as 'A' that ended the year as 'A'. Half of this amount, US$5.5 million, was waived until the maturity of notes in 2024, while the issuer was still negotiating the payment date for the other half. Static pool methodology. Conversely, among nonfinancial entities, willingness to operate with higher leverage to fund share buybacks, expand businesses, or finance acquisitions has gradually increased. S&P Forecast. The company aimed to restructure its debt, capital structure, and business model to adapt to post-COVID-19 prospects. On May 27, 2020, S&P Global Ratings lowered its issuer credit rating on Chile-based Latam Airlines Group S.A. to 'D' from 'CCC-' after the issuer volunteered a reorganization process under Chapter 11 of the Bankruptcy Code in the U.S. We consider that the debt restructuring under Chapter 11 constitutes a default. On May 7, 2020, S&P Global Ratings lowered its long-term issuer credit rating on New Jersey-based vehicle renting and leasing service provider Hertz Global Holdings Inc. to 'SD' from 'CCC-' after the issuer missed lease payments on some of its asset-backed securities. We viewed the repurchases as distressed and tantamount to a default given lenders participating in the repurchase received substantially less than the original promise of the term loan. High technology/computers/office equipment. Australia, Canada, Japan, and New Zealand. This relationship between higher ratings and higher ratings stability holds even over longer time horizons (see table 21) and when broken out by region (see table 22). . On Nov. 18, 2020, S&P Global Ratings lowered the issuer credit ratings to 'D' from 'CCC-' after the issuer missed interest payments due on Oct. 15, 2020, and announced that it had entered into a restructuring support agreement, which it intended to file for bankruptcy. On Oct. 2, 2020, S&P Global Ratings raised its issuer credit rating to 'CCC+' from 'SD'. On July 23, 2020, S&P Global Ratings raised the rating on the issuer to 'CCC-' from 'SD', as the new priming loan is at a senior collateral position relative to the existing debt. Cross-Sector: The . "ESPP" means the Company's 2020 Employee Stock Purchase Plan, . The issuer used 43 million of cash proceeds to repurchase 51 million of notes. Loan loss charges also retreated to well below management's earlier guidance to 117 million (Q3 2020: 273 million) or 10 basis 1Great Financial Crisis 2008/2009. On June 4, 2020, we withdrew the ratings on the issuer because of insufficient information to continue the surveillance of the ratings. Expansive Dataset: Includes more than 800,000 individual debt securities, both corporate and sovereign entities, and default history starting from 1920. . On Sept. 4, 2020, S&P Global Ratings lowered its long-term issuer credit rating on New York-based action sports apparel company Boardriders Inc. to 'SD' from 'CCC+' after the issuer completed a distressed transaction to increase its liquidity and fund operations. However, in most of the relatively benign period since the financial crisis, the two series have diverged somewhat, as they did in 2004-2007. Our updated 2021 energy default rate forecasts are 8% and 6% for LL and HY . We also include the defaulting instruments for each company that S&P Global Ratings rates. Recovery rate is essential to the estimation of the portfolio's loss and economic capital. The issuer was going through debt restructuring for a wider capital improvement, but was adversely affected by falling oil prices and the coronavirus pandemic. The company exchanged $315 million of its existing unsecured notes for new 9% convertible secured notes due 2025, which we considered less than the original promise and tantamount to default. Transition matrices that present averages over multiple time horizons are also calculated as issuer-weighted averages. The issuer has limited refinancing options owing to the disruptions caused by the coronavirus and the presence of foreign currency-denominated debt, about 40%. complementary role in model validation and as benchmarks. There were three additional defaults in 2021 following our last report on Dec. 9, 2021: Malaysia-based engineering and construction company Serba Dinamik Holdings Bhd., China-based (Cayman Island incorporated) real estate company China Evergrande Group, and One confidential issuer. The average amount of debt per defaulter in 2020 was the same as in 2019: $1.6 billion. On July 9, 2020, S&P Global Ratings withdrew its issuer credit rating at the company's request. In periods of high defaults, there tends to be greater variation in the distribution of ratings prior to default, which reduces the Gini. Difference between last four quarters and weighted average, Largest corporate defaulters by outstanding debt amount, Texas Competitive Electric Holdings Co. LLC. The one-year Gini ratio remained high in 2020, at 86.1% (see chart 3). The issuer expects to exchange US$447 million for US$612 million of its senior notes and US$107 million of its old convertible notes. For instance, 92.9% of issuers rated 'A' at the beginning of 2020 were still rated 'A' by Dec. 31, 2020, whereas the comparable share for issuers rated 'B' was only 72%. Sources: S&P Global Ratings Research and S&P Global Market Intelligence's CreditPro. In both cases, the standard deviation of the times to default generally shrinks progressively as the rating gets lower. Some issuers default after S&P Global Ratings no longer rates them. On Jan. 22, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Spanish olive oil bottler Deoleo S.A. to 'SD' from 'CC' after a majority of shareholders agreed for restructuring of its syndicated debt. The transaction was approved by 100% of lenders, and it provided the issuer with additional liquidity. *Or Dec. 31, 1980, whichever is later. Likewise, it would be included in the 1989 and 1990 pools with the 'B' rating. On July 29, 2020, S&P Global Ratings raised the issuer credit rating to 'CCC' following the issuer's completion of the distressed exchange. These weights are based on each cohort's rating level's contribution to the 40-year total issuer base for each rating level. On June 4, 2020, S&P Global Ratings lowered its issuer credit rating on Los Angeles-based restaurant operator California Pizza Kitchen Inc. (CPK) to 'D' from 'CCC-' because the company missed its interest payments due at the end of May 2020 and entered into a forbearance agreement with its lenders. Earlier, on Oct. 1, 2020, S&P Global Ratings lowered the long-term issuer credit rating to 'CC' from 'CCC' after the issuer announced the restructuring transaction. On April 2, 2020, S&P Global Ratings lowered its long-term issuer credit rating on U.K.-based oilfield services company KCA DEUTAG Alpha Ltd. to 'SD' from 'CCC+' after the issuer announced it would use the grace period for interest payments. The debt has been converted from cash to PIK at LIBOR+450 for US$125 million while another US$50 million at LIBOR+1000. On Nov. 16, 2020, Libbey announced that it had successfully emerged from Chapter 11 by completing its financial restructuring. On Oct. 19, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Oklahoma-based home security and monitoring company Central Security Group Inc. to 'SD' from 'CCC-' after the issuer completed a distressed debt exchange on the first-lien credit facility, in which lenders will exchange about US$396 million of their respective claims for a new US$200 million first-lien term loan due 2025 and most of the reorganized equity, and the second-lien lenders will exchange 100% of their US$50 million claim for 1% of the company's reorganized equity. The sovereign downgrades of China in 2017, the U.K. in 2016, France in 2012, and the U.S. in 2011 have factored into the downgrades of many higher-rated financial services companies. As is the case globally, the proportion of speculative-grade ratings reached an all-time high in the U.S. as well, at 57.8%. Later, on May 15, 2020, S&P Global Ratings withdrew its ratings at the issuer's request. On Sept. 28, 2020, S&P Global Ratings raised the issuer credit rating to 'CCC-' from 'SD' following the debt exchange. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poors Financial Services LLC or its affiliates (collectively, S&P). On Nov. 25, 2020, S&P Global Ratings raised the issuer credit rating to 'B-' from 'SD' on its improved maturity profile. On Aug. 26, 2020, S&P Global Ratings lowered its long-term issuer credit rating on New York-based fitness club operator Town Sports International Holdings Inc. to 'SD' from 'CC' after the issuer failed to pay its US$14 million outstanding revolver balance. On Dec. 23, 2020, we raised the issuer credit ratings to 'B-' from 'D'. On July 30, 2020, S&P Global Ratings lowered its long-term issuer credit rating on U.K.-based retailer Missouri TopCo Ltd. to 'SD' from 'CCC-' after the issuer converted its 80 million second-lien notes into a payment-in-kind (PIK) toggle instrument. The issuer was also in talks with its lenders and noteholders for a comprehensive financial restructuring. On Nov. 17, 2020, S&P Global Ratings raised the issuer credit rating to 'CCC+' from 'SD' on lower refinancing risk. We consider the exchange distressed and tantamount to default because, in our view, the transaction offers less than the original promise for the security. On July 23, 2020, S&P Global Ratings lowered its rating on the issuer to 'D' from 'CCC-' upon the company filing for Chapter 11 bankruptcy, following which, on Jan. 5, 2021, the ratings on the issuer were withdrawn. The transaction was viewed as distressed because the remaining US$42 million will now become subordinated, while the noteholders who agreed to the exchange will receive US$850 per US$1,000 principal amount. On May 27, 2020, we withdrew the ratings on the issuer. Most were nonfinancial companies, and five were financial services issuers. default, and recovery information. We considered this exchange as a distressed exchange. On April 14, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Chicago-based printing and digital media company LSC Communications Inc. to 'D' from 'CC' after the issuer filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The analysis excludes public information ("pi") ratings and ratings based on the guarantee of another company or government entity. On Oct. 30, 2020, S&P Global Ratings raised the issuer credit rating to 'CCC+' from 'SD' following the completion of the distressed exchange. The share of management teams citing labor shortages, now at less than a third of the peak in 3Q 2021, indicates loosening in the jobs market. If, however, S&P Global Ratings withdrew the rating prior to Jan. 1 of the year of default, we do not include the issuer in the default rate calculation in that year. On Dec. 2, 2020, S&P Global Ratings lowered its long-term issuer credit rating on U.K.-based payroll software provider Zellis Holdings Ltd. to 'SD' from 'CCC+'. Of these new issuers, 78% were rated speculative grade. Issuers rated 'AAA' were still rated 'AAA' one year later 87.1% of the time, while issuers rated in the 'CCC'/'C' category retained those ratings just 43.1% of the time. On May 14, we lowered the ratings on the issuer to 'D' after it filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. For example, leisure and media has a much higher proportion of speculative-grade ratings than financial institutions or insurance (see chart 20). The cumulative value of the repurchase represents nearly 9% of the term loan debt outstanding compared with the value in fiscal 2019. On Oct. 15, 2020, S&P Global Ratings lowered the issuer credit rating to 'CC' and on Nov. 16, 2020, lowered it to 'SD' from 'CC'. N/A--Not available. Later, on Aug. 11, 2020, we withdrew our issuer credit ratings on the company at its request. While these payments would have a higher interest rate, we considered this modification a selective default since investors were receiving less than they were originally promised under the security, partly because the amendment would delay the timing of the interest payments. Earlier, on March 20, 2020, we lowered the ratings to 'CC' from 'CCC-' based on our view that the issuer has an unsustainable capital structure and weak liquidity. On Feb. 28, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Pennsylvania-based pet food distributor PFS Holding Corp. (PFS) to 'SD' from 'CCC-' after the issuer missed interest payments on its US$ 280 million first-lien bank loan due on Feb. 18, 2020. On Oct. 9, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Brazil-based telecom operator Oi S.A. to 'SD' from 'CC' after the issuer announced that the judicial court ratified the amendment to the company's judicial reorganization plan, which was approved by the majority of its creditholders on Sept. 8, 2020. This nonpayment was considered a general default, and the company was not expected to be able to pay most of its obligations. The default rate Jennifer Tennant for all Moody's-rated corporate issuers rose to 1.9% at the end of 2008 Analyst from 0.3% at year-end 2007. The issuer was hit by an ongoing bankruptcy proceeding of its joint venture partner Sanchez Energy and by the decline in oil prices owing to the Saudi-Russia price war and decline in demand related to the coronavirus pandemic. Subsequently, we withdrew the ratings due to insufficient information. The squared difference between each cohort's transition rate and the weighted average--which is the data point in each cell--is multiplied by each cohort's weight. Others are withdrawn because of a lack of cooperation, particularly when a company is experiencing financial difficulties and refuses to provide all the information needed to continue surveillance on the ratings, or at the entity's request. Meaningfully lower yoy default rates in 2021 are expected for the energy and retail industries, which produced a significant volume of defaults over the prior five years. Second-lien lenders agreed to convert scheduled cash interest payments to payment-in-kind (PIK) interest for three quarters (starting Sept. 30, 2020). Since the beginning of 2020, secured debtholders had received 95% of par, on average, in the form of cash, preferred stock, and common equity for US$130 million of secured notes due 2023. On Feb. 26, 2020, S&P Global Ratings withdrew its ratings on the issuer. Crew Group Inc. to 'D' from 'CCC-' following the company's announced petitions filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. For the full year, there were three large downgrades (and two large upgrades), compared with two downgrades in 2019 (see chart 7). Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of companies in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different studies. On May 29, 2020, we raised the issuer credit rating on DDA to 'CCC' from 'SD' based on DDA's reliance on favorable market conditions to generate sufficient cash flow to meet its near-term debt obligations following its reopening. On May 19, 2020, S&P Global Ratings lowered its issuer credit rating on German value retailer Takko Fashion S.a.r.l. This reflects our forward-looking opinion post the reduction in outstanding gross debt by approximately $127 million. We deem 'D', 'SD', and 'R' issuer ratings to be defaults for the purposes of this study. Rising stars. An S&P Global Ratings issuer credit rating is a forward-looking opinion about an obligor's overall creditworthiness. These are calculated in the same way as the default column in table 20, though table 20 shows the one-year default rates for each rating category for 2020 exclusively. On Dec. 8, 2020, S&P Global Ratings assigned a 'CCC+' issuer credit rating to CPK after the issuer emerged from bankruptcy, where it was able to restructure US$200 million of reported prepetition debt. For example, at the end of 2020, the one-year default rate among all financial entities was 0.23%, compared with 3.8% for all nonfinancial entities. On Aug. 26, 2020, S&P Global Ratings raised the issuer credit rating to 'B-' from 'SD'. The issuer reached an agreement with 78% of its intellectual property notes lender and 71% of its term loan lenders to exchange around US$1.65 billion of debt for equity. This appendix provides summaries of the events leading up to each default and, in some cases, events following the default. As the Gini ratios show, corporate ratings also serve as effective measures of relative risk over time, particularly in low-default years. The negative outlook reflects our view of a potential risk from a prolonged decline in customer's mining and drilling activity and slower-than-expected recovery, which could lead to further liquidity pressure and leverage remaining above 10x ahead of the large debt maturities in 2022, increasing the risk of another distressed transaction. Average cumulative default rate calculation. Throughout the 40-year span, only eight companies initially rated 'AAA' have ever defaulted. The negative outlook reflects the risk of a lower rating if operating performance continues to deteriorate and the company fails to meet our expectations. The key model inputs Moody's uses in its analysis, such as par, rating factor, and the recovery rate assumptions, are based on its published methodology and could differ from the trustee's reported numbers. The group issued a US$450 million senior secured term loan and US$111 million senior secured term loan due in May 2024 and refinanced the US$111 million additional RCF that was maturing in December 2020. The rating action followed the issuer's completed exchange of its unsecured notes of cash and PIK. Some methods for calculating default and rating transition rates might charge defaults against only the initial rating on the issuer, ignoring more recent rating changes that supply more current information. Furthermore, weak liquidity supports our view of O1 Properties' general default. Initial ratings, or those as of Dec. 31, 1980. Sources: S&P Global Ratings Research and S&P Global Market Intelligence's CreditPro. We utilize the Lorenz curve, a graphical representation of the proportionality of a distribution, as one measure of ratings performance, and we summarize this via the Gini coefficient. On June 17, 2020, we withdrew the ratings on the issuer. On April 30, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Australia-based airline company Virgin Australia Holdings Ltd. to 'D' from 'CC' after the company filed for Chapter 15 bankruptcy and announced it would not pay the coupon on its US$425 million senior unsecured notes because of a moratorium on all creditor payments. With the region moving to promote disintermediation, this share of speculative-grade issuers could continue to grow.
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