Key Takeaways
- U.S. and Canadian companies have been raising prices over the past year or so. A few fully restored their margins after an initial lag, but many others' margins eroded.
- Close to half of the sectors and subsectors among speculative-grade issuers improved revenue more than 20%. Media, entertainment, and leisure; restaurants and retailing; and technology have mixed success.
- Highly leveraged issuers will find 2023 a challenging operating environment to keep up with the rising borrowing costs.
- In the last quarter of 2022, the average recovery estimates for new first-lien debt nudged higher.
The battle against cost inflation was widely shared in 2022. But not everything about the experience is shared. One question emerging from this: Which industry has and will continue to withstand rising inflation and slowing growth? Even companies in the same sector vary in the ability to pass on costs and withstand inflation.
In this report, we analyze the resilience of corporate profits and main factors behind margin erosions. Also, we continue to track key credit trends for North American speculative-grade rated corporate entities rated by S&P Global Ratings. However, to better evaluate free operating cash flow (FOCF) and interest coverage ratios (including the full burden of interest rate increases), we've recalculated these measures using annualized interest expenses from the third quarter of 2022. A lack of meaningful cash flow without offsetting liquidity positions will continue to increase downgrade rates at the lower end of the speculative-grade scale.
We also review the trends in first-lien, new-issue recovery estimates, which have strengthened lately because of a stronger borrower mix. This is based on a small dataset of new issues in the last quarter of 2022.
The Most And Least Successful In Recovering Rising Costs
One of the biggest challenges in 2022 is increasing input costs, whether from commodity and raw materials, labor, or logistics. To weather soaring costs, companies have been raising prices for their goods and services over the past year or so, including many that implemented multiple price increases despite the risk of hurting market share. While the most successful few fully restored their margins after the initial lag, many other companies' margins eroded. Pinched between receding demand and stubbornly high costs, margin pressure will likely continue in 2023. To glean insights on sectors' margin resilience, we compared reported EBITDA margins for the 12 months ended Sept. 30, 2022, with the same period one year prior for speculative-grade companies that we rate in the U.S. and Canada (table 1).
All told, companies made impressive progress in increasing their top-line revenue. Close to half of the sectors and subsectors among speculative-grade issuers improved revenue more than 20% (year-over-year median). Even in the third quarter of 2022, when the economic outlook darkened significantly, companies in aggregate still managed to score revenue growth. However, despite higher median revenues, median EBITDA margins slid notably in most sectors. The scale of operation, product differentiation, and built-in price escalators have proven to be critical competitive strengths affecting companies' ability to pass on costs and maintain margins effectively.
Table 1
| Year-Over-Year Change In Revenue And EBITDA Margin | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For trailing-12-months periods ended Sept. 30 | ||||||||||||||||
| --Revenue (Mil. $)-- | --EBITDA margin-- | |||||||||||||||
| Sector | Entities | 2021 | 2022 | Change | 2021 | 2022 | Change | |||||||||
| Aerospace and defense | 35 | $1,707 | $1,811 | 6% | 10% | 11% | 1% | |||||||||
| Automotive parts producers and suppliers | 39 | $2,232 | $2,324 | 4% | 8% | 8% | 0% | |||||||||
| Capital goods/machinery and equipment | 92 | $954 | $1,178 | 24% | 14% | 14% | -1% | |||||||||
| Chemicals | 51 | $1,666 | $1,925 | 16% | 17% | 15% | -2% | |||||||||
| Consumer products | ||||||||||||||||
| Agribusiness | 5 | $2,048 | $2,123 | 4% | 9% | 9% | 0% | |||||||||
| Food and kindred products | 9 | $692 | $806 | 16% | 14% | 10% | -3% | |||||||||
| Home furnishings | 6 | $2,387 | $3,137 | 31% | 12% | 12% | 0% | |||||||||
| Packaged and branded food | 23 | $989 | $1,238 | 25% | 9% | 10% | 1% | |||||||||
| Personal care and household products | 17 | $900 | $776 | -14% | 13% | 12% | 0% | |||||||||
| Other consumer products including miscellaneous, beverages, appliances, and tobacco | 40 | $1,221 | $1,235 | 1% | 14% | 10% | -4% | |||||||||
| Engineering and construction | 24 | $933 | $1,043 | 12% | 9% | 8% | 0% | |||||||||
| Environmental services | 12 | $689 | $861 | 25% | 15% | 14% | 0% | |||||||||
| Health care | ||||||||||||||||
| Health care equipment | 22 | $459 | $501 | 9% | 16% | 11% | -5% | |||||||||
| Health care services | 112 | $815 | $964 | 18% | 15% | 12% | -4% | |||||||||
| Pharmaceuticals | 18 | $1,860 | $1,768 | -5% | 24% | 20% | -5% | |||||||||
| Technology | ||||||||||||||||
| Diversified technology | 7 | $3,173 | $3,866 | 22% | 7% | 7% | 0% | |||||||||
| High tech equipment | 21 | $1,950 | $1,494 | -23% | 12% | 11% | -1% | |||||||||
| Semiconductors | 15 | $1,430 | $1,815 | 27% | 22% | 24% | 3% | |||||||||
| Software and services | 107 | $529 | $648 | 23% | 21% | 22% | 1% | |||||||||
| Media, entertainment, and leisure | ||||||||||||||||
| Gaming | 32 | $561 | $839 | 49% | 31% | 25% | -6% | |||||||||
| Hotels and lodging | 16 | $1,246 | $1,951 | 57% | 13% | 26% | 13% | |||||||||
| Internet | 7 | $1,200 | $1,379 | 15% | 23% | 23% | 0% | |||||||||
| Leisure equipment | 11 | $1,379 | $2,051 | 49% | 13% | 11% | -2% | |||||||||
| Leisure operators including cruise | 22 | $495 | $1,133 | 129% | 0% | 8% | 8% | |||||||||
| Publishing and printing | 12 | $1,511 | $1,687 | 12% | 12% | 11% | -1% | |||||||||
| TV and radio | 25 | $1,221 | $1,256 | 3% | 24% | 23% | -1% | |||||||||
| Other media and rntertainment including miscellaneous, data publishers, advertising agencies, etc. | 65 | $884 | $1,192 | 35% | 11% | 16% | 5% | |||||||||
| Metals and mining | 54 | $1,400 | $1,903 | 36% | 18% | 19% | 1% | |||||||||
| Oil and gas exploration and production | 49 | $929 | $2,183 | 135% | 56% | 71% | 15% | |||||||||
| Oilfield services | 23 | $712 | $1,154 | 62% | 12% | 16% | 4% | |||||||||
| Packaging | 32 | $1,215 | $1,680 | 38% | 14% | 14% | 0% | |||||||||
| Real estate/building materials/forest prodcuts | ||||||||||||||||
| Building materials and products | 50 | $1,908 | $2,238 | 17% | 12% | 14% | 1% | |||||||||
| Paper/forest products | 10 | $1,709 | $2,130 | 25% | 13% | 11% | -2% | |||||||||
| Homebuilders and real estate developers | 22 | $2,556 | $2,734 | 7% | 12% | 15% | 3% | |||||||||
| Real estate investment trusts or companies | 12 | $568 | $583 | 3% | 61% | 61% | 0% | |||||||||
| Restaurants/retailing | ||||||||||||||||
| Department stores | 6 | $9,513 | $11,356 | 19% | 8% | 9% | 1% | |||||||||
| Discount stores | 5 | $2,974 | $2,583 | -13% | 6% | 4% | -2% | |||||||||
| Food service and restaurants | 22 | $1,733 | $1,825 | 5% | 13% | 12% | -1% | |||||||||
| Supermarkets | 10 | $8,069 | $8,541 | 6% | 4% | 5% | 0% | |||||||||
| Other retailers including miscellaneous and automotive | 53 | $1,927 | $2,235 | 16% | 10% | 9% | -1% | |||||||||
| Services | ||||||||||||||||
| Business/consumer/professional services | 150 | $833 | $1,062 | 28% | 15% | 13% | -2% | |||||||||
| Facilities services | 19 | $770 | $1,166 | 51% | 12% | 15% | 3% | |||||||||
| Telecom | 57 | $976 | $1,075 | 10% | 34% | 32% | -2% | |||||||||
| Textile and apparel | 33 | $1,571 | $1,661 | 6% | 13% | 11% | -2% | |||||||||
| Transportation | ||||||||||||||||
| Air transport including airlines | 13 | $3,556 | $4,665 | 31% | 3% | 7% | 4% | |||||||||
| Transportation excluding air transport | 28 | $1,377 | $1,802 | 31% | 13% | 12% | -1% | |||||||||
| Total | 1,493 | $1,079 | $1,360 | 26% | 15% | 15% | 0% | |||||||||
| Revenue and EBITDA as reported in financial statements and without adjustment from S&P Global Ratings. EBITDA defined as revenue minus operating expenses plus depreciation and amortization. Source: S&P Global Ratings. | ||||||||||||||||
A closer look at industries reveals nuances among subsectors. Within the full media, entertainment, and leisure sector, strong margin gains in hotels and lodging (up 13%) and leisure operators, including cruise lines (up 8%), both capitalizing on the COVID-19 pandemic rebound and strong travel environment, were held back by the margin deterioration of gaming (down 6%). The latter, however, may only reflect a downshift from a high-water mark in 2021, buoyed by increased accumulated consumer savings and the receipt of U.S. government stimulus funds rather than something worse.
Restaurants and retailing companies are more sensitive to fears of an economic slowdown. Value-oriented retailers such as 99 Cents Only Stores LLC, margins contracted more than elsewhere. This is because low-income households are the most sensitive to price increases and have since cut down on spending, while consumers in the higher-income brackets have been less deterred. In this regard, discount stores stood out as the only subsector reporting top-line declines, further exacerbated by a 1.8% margin contraction. Comparatively, department stores that carry luxury brands and others are now ahead of 2021 in revenue and margin. We expect some part of this trend to continue because luxury brands tend to be more resilient even during credit downturns.
Input cost inflation has been a major disrupter for companies in food and kindred products, resulting in the group having the largest margin deterioration of the consumer products sector. A wide array of inflation-related margin pressures has manifested in a handful of downgrades to the 'CCC' category. For instance, higher costs on plastic packaging, fruit, and dairy have prompted Sierra Enterprises LLC (rated 'CCC+'), which serves quick-service restaurants such as McDonald's Corp. and Dunkin, to aggressively bump prices last year to catch up with inflation. While Sierra increased sales 12.4% year over year through the first three quarters of fiscal 2022, we believe it will likely continue to face margin pressure and an unsustainable capital structure unless its input costs stabilize. Sierra may be an extreme case, but it is not alone in this respect.
In technology, semiconductors had the most success in passing along higher component and logistics costs in light of the persistent chip shortage, followed by software and services companies; the median EBITDA margin has barely budged. Many software companies benefited from annual price escalators incorporated in their subscription or maintenance services contracts, giving them an edge in extracting higher prices when contracts come up for renewal. This, however, does not shield them from swings in consumer demand. For one, demand for consumer electronics and PCs has started to wane. The deteriorating macroeconomic environment has dampened the growth trajectory for the tech sector in 2023, as we anticipate more scrutiny before information technology purchasing decisions.
A few health care companies descended from peak margins levels after the retreat of government support and pandemic-induced demand surge. More broadly, demand for health care services and equipment was strong throughout last year, seen in a median revenue increase of 15% year over year, but staffing shortages and persistent inflation have resulted in low- to mid-single-digit percent margin decline. With margins declining for over 70% of companies in the sector, the breadth of the compression fuels unease about an industry traditionally considered defensive and noncyclical. To the extent that softening demand has spurred more spending cuts, we believe this may lead companies to postpone the purchase of health care equipment and the implementation of new contracts for health care information technology providers. We also believe companies will be challenged to pass along the bulk of their higher costs in the upcoming reimbursement negotiations with payers.
Surging Interest Expense Will Challenge 'B-' Rated Companies Already Weak Cash Flow, A Significant Risk To Ratings
We summarize key sector-level credit trends--including interest coverage, FOCF to debt, profit growth, and leverage--and review how these metrics have transitioned over time through rolling-12-months windows that ended on each quarter end. We've compared the quarter-over-quarter change in these last-12-months metrics to track the EBITDA growth transition. The sample covers 1,020 public and private companies that we rate in the U.S. and Canada. More details on how we built the sample are in the Data Used In This Report section below.
In our view, highly leveraged issuers with mostly floating-rate debt originated before the start of hiking cycle will find 2023 a challenging operating environment to keep up with the rising borrowing costs to the extent that they don't have any interest rate hedge in place. Their ability to service debt will depend on liquidity on hand and how much cash they can generate from their operations. As it stands, cash flow generation continues to weaken. The median ratio of FOCF to debt persistently declined in 2022 despite the scarcity of debt-funded activities. Many companies are scaling back capital spending and/or shareholder distributions amid increasing economic uncertainties. Still, this ratio remains significantly lower than it was at the start of the year (Appendix, table 1). Somewhat comforting is the observation that the median EBITDA interest coverage ratio continues to hold up relatively well, as does EBITDA growth, which has been strong enough to handle increased input costs through the third quarter of 2022 (Appendix, table 3).
To account for rate hikes not felt early in 2022 (and not captured in our trailing-12-months measures), we calculate a more forward-looking set of interest coverage and FOCF-to-debt ratios using annualized 2022 third quarter interest expenses. We focus here on 'B-' rated issuers, which are the most vulnerable, and the charts below list sectors with a size equal to or greater than 15 issuers. Corporate issuers at the higher end of the speculative-grade scale often have hedging in place, providing some buffer to rising interest costs, in addition to being somewhat less sensitive to interest rate pressure because they have less debt leverage.
Chart 1
Chart 2
The analysis suggests that media EBITDA interest coverage of 'B-' rated firms shed 0.2x to 1.6x on this adjusted basis, and the tally of companies with FOCF deficits will expand to 62% from 55%. About three-quarters of these companies based on our calculation will have only minimal or negative free operating cash flow (characterized by FOCF-to-debt below 2%), and about one-third will fall short of sufficient interest coverage (EBITDA interest coverage below 1.1x). We expect consumer products and health care companies to have the most strained debt service capacity. When annualized, interest expenses will likely dimmish FOCF for all 16 'B-' rated consumer products companies in the sample. This is followed by 74% of 'B-' rated health care and 67% of business and consumer services.
A caveat is that we use EBITDA and FOCF for the last 12 months ended on Sept. 30, 2022, in the calculation, which does not reflect our analysts' growth projection for 2023. Similarly, this simple math does not account for realized synergies (as opposed to estimated future ones) or the roll-off of cash restructuring and implementation costs that we have considered in our rating analysis. Without these, we expect only one in three 'B-' rated entities with an FOCF deficit to have enough cash on hand to cover its near-term cash outflow, indicated by available cash and cash equivalents as of Sept. 30, exceeding three times interest expense in the third quarter of 2022. The remainder might have to explore other sources of liquidity to cover interest payments.
Hefty capital spending needs also pose a particular risk as they directly affect debt servicing capacity. This partially explains why a high-capital-intensity sector such as capital goods/machine and equipment--which involves printing, packaging services, manufacturing, etc.--as a whole ranks near the top in EBITDA interest coverage but is significantly worse off in the FOCF-to-debt measure. Capital-intensive companies typically have less flexibility to cope with receding demand because of their rather fixed-cost structure. They also have nondeferrable investment needs--telecom and health care information technology companies, for example, all invest heavily upfront to remain competitive--or the needs to continually invest to expand into the scale required to break even (such as many early-stage software companies). These needs often call for sizable asset financing, which ultimately underpins high leverage. Lastly, for those 'B-' rated companies pursuing large development spending for new projects, it's not unusual that they significantly rely on a small cash flow base for debt servicing until they can sufficiently ramp up these projects. Together, these companies are more vulnerable to negative rating actions in a recession.
However, there is also upside potential. To start, we expect supply chain dynamics to improve in 2023. Companies are being more thoughtful and flexible about nonfixed costs and working capital management. Those that put in cost-cutting measures in recent quarters might start to see results. The other was one-time costs related to acquisitions or leveraged buyouts and related financings in the last quarter of 2021 would be rolled off in the next three months.
Other noteworthy trends that emerged are:
- Profit growth diminished further, pulled down by sizable drops in sectors more directly exposed to consumer spending. Median last-12-months EBITDA growth slowed to 1.5% at the end of September 2022 and remained well below 2021 levels (Appendix, table 5).
- Median quarterly EBITDA growth in the third quarter of 2023 hit over 50% of sectors, with health care, restaurant/retailing, and telecommunications seeing persistent declines.
- The overall leverage picture was relatively unchanged in the third quarter as debt growth declined versus profit slowdown. Median last-12-months gross leverage ended the third quarter of 2022 at 5x (Appendix, table 7), just modestly below the 5.1x one quarter earlier.
- Only three sectors have leverage running meaningfully higher than year-end 2021: chemicals, health care, and telecommunications. Chemicals companies delivered solid profit growth until recently. Lower GDP growth in coming quarters will have a differing impact on the chemicals sector depending on end-market exposure. Fertilizers and agricultural chemicals will be on a different trajectory than petrochemicals catering to U.S. housing and automotive.
As Investors Refocus On Quality, Recovery Prospects Improve For First-Lien New Issues
Chart 3 illustrates the quarterly trends of our recovery expectations for first-lien new issues, measured by the average recovery point estimates. In general, new-issue recovery prospects fluctuate with shifts in investors' risk tolerance. In the last quarter of 2022, when there was little tolerance for risky assets, the average recovery estimates nudged higher, driven by a higher proportion of high-quality debt from 'BB' category rated entities. Meanwhile, the share of issues with '3' recovery ratings (which implies 50%-70% recovery in the event of payment default) is still the largest category by issue count, but that is shifting to higher recovery assessments of '1' (90%-100%) and '2' (70%-90%) (chart 4). We note that datasets of the past two quarters have been unusually thin. Each had fewer than 80 new first-lien issuances, compared with a quarterly average of 319 last year and 193 in 2019.
Over the longer horizon, aggressive structures led by high secured leverage and little junior cushion have eroded first-lien recovery prospects. The past decade marked a period of declining first-lien recoveries relative to the historical average. Based on data collected from North American companies that exited Chapter 11 bankruptcy, actual recoveries of first-lien debt averaged 78% before 2020 (2008-2019) and 68% from 2020 to second-quarter 2021.
Chart 3
Chart 4
While a wave of corporate defaults near term seems unlikely, a recession would inevitably bring more defaults as will a more prolonged period of higher interest rates. We expect the U.S. trailing-12-months speculative-grade corporate default rate to reach 3.75% by September 2023 under our base-case forecast, from 1.7% (preliminary) at the end of 2022. This foreshadows more distressed restructures ahead, which will draw out the timeline for court-supervised restructurings. In its worst form, out-of-court restructurings can come either as super-priority debt or structurally-senior debt enabled through collateral transfer. Both can result in material negative recovery implications for most existing first-lien lenders. Because it is nearly impossible to predict not only whether such transactions will take place, but also how it will play out (as size, the relative priority of new borrowings, and use of new proceeds can significantly affect all aspects of our analysis), we capture these events as part of our surveillance process whereas center our recovery analysis on a company's current debt structure.
Appendix
Table 1
| Median Free Operating Cash Flow To Debt By Industry | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --12-month periods (%)-- | ||||||||||||||||||||||
| Industry | Entities | Ended Dec. 31, 2019 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||||
| Aerospace and defense | 28 | 5.0 | 4.2 | 2.5 | 3.2 | 3.0 | 4.4 | 3.8 | 5.0 | 4.1 | ||||||||||||
| Auto and trucks | 28 | 8.1 | 9.0 | 10.9 | 13.0 | 2.6 | (3.3) | (4.8) | (2.7) | 0.4 | ||||||||||||
| Business and consumer services | 79 | 3.4 | 6.2 | 6.9 | 6.8 | 6.1 | 3.8 | 3.4 | 2.3 | 2.3 | ||||||||||||
| Capital goods, machine, equipmebnt | 107 | 3.1 | 8.3 | 8.6 | 5.7 | 2.8 | 1.5 | 0.5 | 0.4 | 0.4 | ||||||||||||
| Chemicals | 31 | 3.9 | 5.2 | 5.4 | 6.9 | 9.3 | 7.2 | 5.1 | 3.1 | 4.7 | ||||||||||||
| Consumer products | 86 | 5.6 | 9.3 | 8.9 | 6.1 | 4.2 | 3.0 | 1.0 | (0.0) | (0.4) | ||||||||||||
| Forest products, building materials, packaging | 46 | 8.8 | 13.6 | 13.2 | 9.9 | 4.9 | 3.0 | 0.8 | 1.2 | 1.3 | ||||||||||||
| Health care | 98 | 1.7 | 5.3 | 8.0 | 4.9 | 3.0 | 1.9 | 1.0 | 0.2 | (1.1) | ||||||||||||
| Media, entertainment, and leisure | 148 | 6.5 | 4.3 | 4.7 | 6.4 | 4.7 | 3.8 | 3.4 | 5.0 | 4.2 | ||||||||||||
| Mining and minerals | 44 | 5.7 | 6.5 | 8.2 | 6.4 | 7.0 | 10.4 | 10.2 | 11.9 | 12.2 | ||||||||||||
| Oil and gas | 63 | 0.1 | 2.4 | 4.5 | 5.6 | 6.7 | 10.3 | 13.0 | 22.7 | 34.6 | ||||||||||||
| Restaurants and retailing | 84 | 5.2 | 13.1 | 14.5 | 14.0 | 11.4 | 9.2 | 6.3 | 2.6 | 1.7 | ||||||||||||
| Real estate | 20 | 5.8 | 6.8 | 10.7 | 6.9 | 3.4 | (1.0) | (0.3) | 2.0 | 2.4 | ||||||||||||
| Technology | 90 | 4.3 | 8.2 | 9.4 | 10.1 | 9.4 | 8.9 | 7.2 | 6.4 | 5.3 | ||||||||||||
| Telecommunications | 41 | 3.6 | 4.1 | 6.8 | 5.6 | 4.7 | 3.9 | 3.0 | 2.4 | 1.1 | ||||||||||||
| Transportation | 27 | 0.5 | (2.5) | (2.5) | 0.1 | 0.1 | 0.9 | 2.3 | 0.9 | 0.5 | ||||||||||||
| Total | 1,020 | 4.4 | 6.9 | 7.3 | 6.6 | 5.4 | 4.5 | 3.2 | 2.5 | 2.1 | ||||||||||||
| FOCF as reported and without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the Data Used In This Report section. Source: S&P Global Ratings. | ||||||||||||||||||||||
Table 2
| Median Free Operating Cash Flow To Debt By Rating | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --12-month periods (%)-- | ||||||||||||||||||||||
| Issuer Credit Rating* | Entities | Ended Dec. 31, 2019 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||||
| BB+ | 105 | 12.5 | 17.9 | 21.9 | 18.9 | 19.5 | 16.7 | 15.3 | 12.9 | 12.8 | ||||||||||||
| BB | 113 | 13.7 | 16.4 | 16.4 | 17.2 | 17.8 | 14.8 | 14.7 | 12.9 | 14.2 | ||||||||||||
| BB- | 102 | 10.0 | 13.7 | 18.1 | 14.7 | 13.3 | 11.2 | 8.0 | 8.4 | 6.2 | ||||||||||||
| B+ | 148 | 5.7 | 7.5 | 8.3 | 8.7 | 8.7 | 7.4 | 6.1 | 6.0 | 6.6 | ||||||||||||
| B | 191 | 3.5 | 6.4 | 6.8 | 5.7 | 3.2 | 3.6 | 2.3 | 1.8 | 1.5 | ||||||||||||
| B- | 238 | 1.0 | 4.2 | 3.8 | 2.3 | 1.2 | 0.8 | (0.1) | (1.1) | (1.2) | ||||||||||||
| CCC+ | 88 | (3.2) | 0.2 | 1.1 | (1.5) | (3.3) | (3.6) | (4.6) | (5.0) | (5.2) | ||||||||||||
| CCC | 23 | 0.9 | 3.5 | 0.2 | (1.5) | (5.1) | (6.1) | (6.4) | (9.1) | (7.6) | ||||||||||||
| CCC- | 10 | (4.7) | 0.6 | (0.0) | (3.8) | (4.3) | (6.9) | (8.5) | (6.6) | (5.3) | ||||||||||||
| CC | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | ||||||||||||
| Total | 1,020 | 4.4 | 6.9 | 7.3 | 6.6 | 5.4 | 4.5 | 3.2 | 2.5 | 2.1 | ||||||||||||
| *Rating as of Dec. 27, 2022. NM--Not meaningful. FOCF as reported and without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the Data Used In This Report section. Source: S&P Global Ratings. | ||||||||||||||||||||||
Table 3
| Median EBITDA Interest Coverage By Industry | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --12-month periods (x)-- | ||||||||||||||||||||||
| Industry | Entities | Ended Dec. 31, 2019 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||||
| Aerospace and defense | 28 | 3.7 | 2.5 | 2.3 | 2.7 | 2.7 | 3.2 | 2.3 | 3.0 | 3.1 | ||||||||||||
| Auto and trucks | 28 | 4.1 | 2.9 | 3.2 | 4.4 | 4.4 | 4.5 | 4.4 | 3.9 | 4.3 | ||||||||||||
| Business and consumer services | 79 | 2.1 | 2.3 | 2.6 | 2.6 | 2.6 | 2.8 | 3.2 | 3.0 | 2.9 | ||||||||||||
| Capital goods, machine, and equipment | 107 | 3.0 | 2.8 | 3.0 | 3.0 | 2.8 | 3.2 | 3.6 | 3.4 | 3.5 | ||||||||||||
| Chemicals | 31 | 3.0 | 2.5 | 3.0 | 3.5 | 4.4 | 4.5 | 5.1 | 5.0 | 4.7 | ||||||||||||
| Consumer products | 86 | 2.5 | 2.7 | 2.9 | 3.2 | 3.1 | 3.0 | 3.0 | 3.3 | 3.2 | ||||||||||||
| Forest prodcuts, building materials, packaging | 46 | 3.7 | 4.2 | 3.9 | 4.3 | 4.7 | 5.2 | 5.1 | 5.0 | 5.3 | ||||||||||||
| Health care | 98 | 1.8 | 1.8 | 2.0 | 2.2 | 2.3 | 2.2 | 2.1 | 1.9 | 1.6 | ||||||||||||
| Media, entertainment, and leisure | 148 | 2.9 | 1.6 | 1.7 | 2.0 | 2.1 | 2.3 | 2.5 | 2.6 | 2.7 | ||||||||||||
| Mining and minerals | 44 | 4.8 | 3.5 | 3.8 | 4.9 | 5.6 | 6.5 | 8.2 | 8.0 | 7.3 | ||||||||||||
| Oil & Gas | 63 | 5.5 | 2.5 | 2.6 | 3.4 | 4.5 | 6.3 | 7.5 | 9.7 | 13.7 | ||||||||||||
| Restaurants and retailing | 84 | 2.8 | 2.1 | 2.8 | 3.7 | 3.7 | 3.9 | 4.1 | 4.5 | 4.4 | ||||||||||||
| Real estate | 20 | 3.6 | 3.3 | 3.3 | 3.4 | 3.2 | 3.5 | 3.8 | 3.6 | 3.7 | ||||||||||||
| Technology | 90 | 1.9 | 2.3 | 2.4 | 2.5 | 2.5 | 2.6 | 2.8 | 2.5 | 2.3 | ||||||||||||
| Telecommunications | 41 | 2.7 | 3.2 | 3.3 | 3.4 | 3.8 | 3.8 | 3.8 | 4.1 | 4.2 | ||||||||||||
| Transportation | 27 | 4.8 | 1.9 | 1.8 | 2.3 | 2.5 | 2.8 | 3.0 | 3.4 | 3.5 | ||||||||||||
| Total | 1,020 | 2.9 | 2.4 | 2.6 | 3.0 | 3.1 | 3.4 | 3.5 | 3.5 | 3.5 | ||||||||||||
| Coverage is calculated as reported EBITDA over reported interest expense, without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the Data Used In This Report section. Source: S&P Global Ratings. | ||||||||||||||||||||||
Table 4
| Median EBITDA Interest Coverage By Rating | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --12-month periods (x)-- | ||||||||||||||||||||||
| Issuer Credit Rating* | Entities | Ended Dec. 31, 2019 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||||
| BB+ | 105 | 6.3 | 5.9 | 7.0 | 7.9 | 8.8 | 8.8 | 9.2 | 9.3 | 9.2 | ||||||||||||
| BB | 113 | 5.6 | 5.2 | 5.9 | 6.1 | 6.7 | 7.4 | 8.0 | 8.4 | 8.2 | ||||||||||||
| BB- | 102 | 4.5 | 4.3 | 4.3 | 5.4 | 5.7 | 6.2 | 6.5 | 6.1 | 5.8 | ||||||||||||
| B+ | 148 | 3.1 | 2.8 | 3.2 | 3.7 | 4.0 | 4.5 | 4.4 | 4.5 | 4.7 | ||||||||||||
| B | 191 | 2.6 | 2.3 | 2.5 | 2.7 | 2.8 | 3.0 | 3.2 | 3.1 | 3.2 | ||||||||||||
| B- | 238 | 1.7 | 1.7 | 1.7 | 1.9 | 1.8 | 1.8 | 1.9 | 1.9 | 1.8 | ||||||||||||
| CCC+ | 88 | 1.4 | 1.1 | 1.1 | 1.4 | 1.2 | 1.3 | 1.2 | 1.2 | 1.2 | ||||||||||||
| CCC | 23 | 1.4 | 0.6 | 0.6 | 0.7 | 0.6 | 0.8 | 0.8 | 0.9 | 0.8 | ||||||||||||
| CCC- | 10 | 0.8 | 1.0 | 1.1 | 1.1 | 0.8 | 0.7 | 0.6 | 0.3 | 0.2 | ||||||||||||
| CC | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | ||||||||||||
| Total | 1,020 | 2.9 | 2.4 | 2.6 | 3.0 | 3.1 | 3.4 | 3.5 | 3.5 | 3.5 | ||||||||||||
| *Rating as of Dec. 27, 2022. Coverage is calculated as reported EBITDA over reported interest expense, without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the Data Used In This Report section. Source: S&P Global Ratings. | ||||||||||||||||||||||
Table 5
| Median EBITDA Growth By Industry | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Quarter over quarter reported in 12-month periods (%)-- | ||||||||||||||||||
| Industry | Entities | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||
| Aerospace and defense | 28 | -2.6% | 1.6% | 3.7% | 6.7% | -1.2% | -0.2% | 0.4% | ||||||||||
| Auto and trucks | 28 | 16.6% | 28.2% | 1.2% | 3.5% | -0.2% | 4.3% | 1.2% | ||||||||||
| Business and consumer Services | 79 | 4.0% | 5.9% | 4.2% | 3.0% | 2.4% | 1.8% | 2.9% | ||||||||||
| Capital goods, machine, and equipment | 107 | 3.6% | 5.4% | 1.9% | 1.9% | 3.7% | 4.8% | 4.6% | ||||||||||
| Chemicals | 31 | 5.8% | 13.1% | 8.7% | 4.9% | 5.5% | 2.9% | -0.9% | ||||||||||
| Consumer products | 86 | 7.8% | 8.8% | 1.8% | 1.4% | -1.0% | 0.6% | -1.6% | ||||||||||
| Forest products, building materials, package | 46 | 7.9% | 11.3% | 1.3% | 1.0% | 7.4% | 9.4% | 4.0% | ||||||||||
| Health care | 98 | 8.6% | 9.1% | 3.3% | 0.6% | -1.2% | -2.0% | -2.2% | ||||||||||
| Media, entertainment, and leisure | 148 | 2.3% | 25.1% | 9.4% | 5.6% | 5.3% | 3.5% | 1.9% | ||||||||||
| Mining and minerals | 44 | 7.0% | 22.4% | 15.4% | 11.2% | 10.1% | 7.6% | -0.9% | ||||||||||
| Oil and gas | 63 | 1.7% | 36.0% | 27.3% | 37.0% | 19.0% | 26.3% | 18.1% | ||||||||||
| Restaurants/retailing | 84 | 9.4% | 28.9% | 1.3% | 5.3% | 1.0% | -0.8% | -0.3% | ||||||||||
| Real estate | 20 | 2.5% | 6.8% | 4.6% | 5.2% | 3.6% | 5.0% | 5.0% | ||||||||||
| Technology | 90 | 7.2% | 4.9% | 5.4% | 4.2% | 2.5% | 0.0% | 0.6% | ||||||||||
| Telecommunications | 41 | 2.4% | 2.9% | 0.7% | -0.7% | -2.2% | -2.8% | -1.3% | ||||||||||
| Transportation | 27 | -2.9% | 22.8% | 13.0% | 11.0% | 2.7% | 3.4% | 5.5% | ||||||||||
| Total | 1,020 | 5.1% | 11.0% | 4.7% | 4.1% | 3.0% | 2.4% | 1.5% | ||||||||||
| Reported EBITDA without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in "Data Used In This Report" section. Source: S&P Global Ratings. | ||||||||||||||||||
Table 6
| Median EBITDA Growth By Rating | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Quarter over quarter reported 12-month periods (%)-- | ||||||||||||||||||
| Issuer Credit Rating* | Entities | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | ||||||||||
| BB+ | 105 | 5.1% | 11.1% | 4.8% | 5.0% | 4.4% | 2.6% | 1.6% | ||||||||||
| BB | 113 | 5.2% | 10.6% | 5.9% | 2.4% | 2.3% | 2.9% | 0.3% | ||||||||||
| BB- | 102 | 5.9% | 16.6% | 4.6% | 4.3% | 3.1% | 0.0% | 1.3% | ||||||||||
| B+ | 148 | 6.4% | 16.0% | 8.3% | 7.9% | 4.4% | 1.8% | 1.8% | ||||||||||
| B | 191 | 6.4% | 11.3% | 6.4% | 4.1% | 3.7% | 5.6% | 2.6% | ||||||||||
| B- | 238 | 4.9% | 7.4% | 3.3% | 2.4% | 1.7% | 0.6% | 1.5% | ||||||||||
| CCC+ | 88 | 0.5% | 5.9% | 0.8% | 0.1% | -0.3% | 4.0% | 1.1% | ||||||||||
| CCC | 23 | -0.5% | 14.8% | 1.6% | 12.4% | 0.3% | 7.0% | 10.5% | ||||||||||
| CCC- | 10 | 2.3% | 5.5% | -14.1% | -3.1% | -2.3% | -6.6% | -10.6% | ||||||||||
| CC | NM | NM | NM | NM | NM | NM | NM | NM | ||||||||||
| Total | 1,020 | 5.1% | 11.0% | 4.7% | 4.1% | 3.0% | 2.4% | 1.5% | ||||||||||
| NM--Not meaningful. Rating as of Dec. 27, 2022. Source: S&P Global Ratings. | ||||||||||||||||||
Table 7
| Median Gross Leverage By Industry | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Reported 12-month periods (x)-- | ||||||||||||||||||||||||||||
| Industry | Entities | Ended Dec. 31, 2019 | Ended March 31, 2020 | Ended June 30, 2020 | Ended Sept. 30, 2020 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | |||||||||||||||
| Improved or deleveraged compared to year-end 2021 | ||||||||||||||||||||||||||||
| Aerospace/Defense | 29 | 4.5 | 4.6 | 6.2 | 5.5 | 5.6 | 6.9 | 6.2 | 5.7 | 5.8 | 6.6 | 4.9 | 4.8 | |||||||||||||||
| Media, Entertainment & Leisure | 153 | 5.0 | 6.2 | 8.6 | 8.5 | 9.1 | 9.3 | 7.2 | 6.7 | 6.8 | 6.0 | 5.7 | 5.4 | |||||||||||||||
| Oil & Gas | 66 | 2.9 | 3.0 | 4.2 | 5.3 | 5.1 | 5.3 | 4.1 | 3.0 | 2.0 | 1.8 | 1.2 | 0.9 | |||||||||||||||
| Real Estate | 29 | 7.2 | 8.8 | 7.9 | 8.3 | 7.8 | 6.0 | 5.8 | 6.6 | 5.7 | 5.7 | 5.1 | 5.0 | |||||||||||||||
| Transportation | 27 | 4.5 | 4.6 | 6.6 | 7.8 | 9.7 | 10.3 | 7.2 | 6.1 | 6.0 | 5.3 | 4.6 | 4.4 | |||||||||||||||
| Worse: Leverage increased from year-end 2021 levels | ||||||||||||||||||||||||||||
| Chemicals | 31 | 5.3 | 5.5 | 6.4 | 6.8 | 6.2 | 4.9 | 4.3 | 4.0 | 3.8 | 4.0 | 4.3 | 4.3 | |||||||||||||||
| Healthcare | 100 | 7.0 | 8.0 | 8.4 | 7.9 | 8.0 | 7.3 | 6.7 | 6.9 | 7.9 | 8.2 | 8.6 | 9.6 | |||||||||||||||
| Telecommunications | 42 | 4.9 | 4.9 | 4.7 | 4.9 | 4.7 | 4.7 | 4.7 | 4.5 | 4.8 | 5.0 | 5.3 | 5.4 | |||||||||||||||
| Leverage relatively flat since year-end 2021 | ||||||||||||||||||||||||||||
| Auto/Trucks | 29 | 3.5 | 4.2 | 6.8 | 6.0 | 5.6 | 5.1 | 3.5 | 3.8 | 3.9 | 4.0 | 4.1 | 3.8 | |||||||||||||||
| Business and Consumer Services | 80 | 6.6 | 7.1 | 6.8 | 6.9 | 6.6 | 6.5 | 6.5 | 6.1 | 6.0 | 6.2 | 6.2 | 5.8 | |||||||||||||||
| Cap Goods/Machine&Equip | 108 | 5.9 | 6.2 | 6.1 | 5.8 | 5.3 | 5.8 | 5.5 | 5.4 | 5.6 | 5.9 | 5.8 | 5.4 | |||||||||||||||
| Consumer Products | 94 | 6.1 | 6.3 | 6.3 | 5.9 | 6.3 | 5.3 | 5.9 | 6.2 | 6.4 | 6.5 | 6.1 | 5.9 | |||||||||||||||
| Forest Prod/Bldg Mat/Packaging | 47 | 4.7 | 5.2 | 4.8 | 4.5 | 4.9 | 4.5 | 4.1 | 3.9 | 4.1 | 4.8 | 4.2 | 3.6 | |||||||||||||||
| Mining & Minerals | 45 | 2.8 | 3.2 | 3.9 | 3.6 | 4.2 | 4.0 | 3.0 | 2.4 | 2.1 | 1.9 | 1.5 | 1.7 | |||||||||||||||
| Restaurants/Retailing | 87 | 5.1 | 5.7 | 6.5 | 5.9 | 5.6 | 5.1 | 4.1 | 4.0 | 3.8 | 3.8 | 3.7 | 3.8 | |||||||||||||||
| Technology | 93 | 7.1 | 6.9 | 7.3 | 6.7 | 6.7 | 6.6 | 6.9 | 6.4 | 7.0 | 6.7 | 7.2 | 7.2 | |||||||||||||||
| Total | 1,060 | 5.2 | 5.9 | 6.6 | 6.3 | 6.3 | 6.0 | 5.4 | 5.4 | 5.3 | 5.3 | 5.1 | 5.0 | |||||||||||||||
| Leverage calculated as reported gross debt over reported EBITDA, without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the “Data Used In This Report” section. Source: S&P Global Ratings. | ||||||||||||||||||||||||||||
Table 8
| Median Gross Leverage By Rating | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Reported 12-month periods (x)-- | ||||||||||||||||||||||||||||
| Issuer Credit Rating | Entities | Ended Dec. 31, 2019 | Ended March 31, 2020 | Ended June 30, 2020 | Ended Sept. 30, 2020 | Ended Dec. 31, 2020 | Ended March 31, 2021 | Ended June 30, 2021 | Ended Sept. 30, 2021 | Ended Dec. 31, 2021 | Ended March 31, 2022 | Ended June 30, 2022 | Ended Sept. 30, 2022 | |||||||||||||||
| BB+ | 108 | 3.3 | 3.4 | 3.7 | 3.5 | 3.3 | 3.4 | 3.0 | 2.8 | 3.0 | 2.7 | 2.7 | 2.5 | |||||||||||||||
| BB | 119 | 3.3 | 3.6 | 4.1 | 4.0 | 3.7 | 3.7 | 3.2 | 3.0 | 3.0 | 2.9 | 2.8 | 3.0 | |||||||||||||||
| BB- | 107 | 4.0 | 4.3 | 4.6 | 4.6 | 4.2 | 4.0 | 3.4 | 3.2 | 3.3 | 3.5 | 3.6 | 3.4 | |||||||||||||||
| B+ | 154 | 4.6 | 5.1 | 5.7 | 5.3 | 5.4 | 5.1 | 4.4 | 4.3 | 4.0 | 4.0 | 3.8 | 3.9 | |||||||||||||||
| B | 198 | 5.9 | 6.6 | 6.9 | 6.8 | 6.6 | 6.0 | 5.7 | 5.6 | 5.5 | 5.6 | 5.3 | 5.0 | |||||||||||||||
| B- | 248 | 7.3 | 7.8 | 8.2 | 8.0 | 9.0 | 8.9 | 8.6 | 8.7 | 8.5 | 8.5 | 8.5 | 8.2 | |||||||||||||||
| CCC+ | 91 | 8.8 | 9.6 | 14.4 | 12.4 | 10.1 | 11.3 | 11.1 | 12.3 | 11.3 | 12.1 | 11.5 | 10.9 | |||||||||||||||
| CCC | 23 | 8.7 | 9.9 | 14.4 | 17.3 | 22.1 | 22.7 | 20.2 | 17.7 | 16.3 | 15.4 | 15.4 | 14.5 | |||||||||||||||
| CCC- | 10 | 14.5 | 19.4 | 27.3 | 20.0 | 11.0 | 12.0 | 13.0 | 17.5 | 25.3 | 31.1 | 36.5 | 55.6 | |||||||||||||||
| CC | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | NM | |||||||||||||||
| Total | 1,060 | 5.2 | 5.9 | 6.6 | 6.3 | 6.3 | 6.0 | 5.4 | 5.4 | 5.3 | 5.3 | 5.1 | 5.0 | |||||||||||||||
| Rating as of Dec. 27, 2022. Leverage is calculated as reported gross debt over reported EBITDA, without adjustment by S&P Global Ratings. The sample in this study is rebalanced each quarter following selection criteria, as detailed in the “Data Used In This Report” section. Source: S&P Global Ratings. | ||||||||||||||||||||||||||||
Data Used In This Report
Our large data set contains all speculative-grade corporate entities that we rate in the U.S. and Canada, both public and private companies. Each quarter, we construct a sample pool from the large set for which we have quarter-end reported financials for every quarter since Dec. 31, 2018. This sample set varies somewhat quarter by quarter as it excludes entities rated 'SD' (selective default) or no longer outstanding as of each quarter end (either due to default or being withdrawn), but it includes new issuers for which we have historical financials. The sample set is generally smaller than the large set but nonetheless a representative sample of the North American speculative-grade universe.
The sample in this report consists of 1,020 companies; some private companies have yet to report third quarter 2022 financials before our extraction date of Dec. 27, 2022. These companies will re-enter the sample once we have all the financials and when we build the next sample.
Rated Research
- U.S. Tech Bracing For The Credit Storm: Ripples Now With A Chance Of Bigger Waves, Dec. 6, 2022
- Inflation, Labor Shortages, Supply-Chain Disruptions, And Rising Interest Rates Are Testing The Credit Resilience Of U.S. MedTech Companies, Nov. 29, 2022
- The U.S. Speculative-Grade Corporate Default Rate Could Reach 3.75% By September 2023, Nov. 21, 2022
- Winter Is Coming For U.S. Tech, Nov. 15, 2022
- U.S. Holiday 2022 Sales Outlook: Santa’s Bag Will Be Smaller This Year, Nov. 10, 2022
- U.S. Leveraged Finance Q3 Update: 'CCC' Buckets Pick Up In CLOs As Cash Flow Generation Falls, Oct. 27, 2022
- Chemical Sector Outlook: Petrochemical Companies Should Have The Cushion To Withstand Some EBITDA Deterioration, Oct. 6, 2022
- Trouble Ahead: Higher Interest Expense Strains 'B-' Rated U.S. Health Care Credits, Sept. 29, 2022
- Recovering From COVID-19: Why The Timing Of Bankruptcy And Emergence Matters For Debt Recovery, Feb. 7, 2022
- A Closer Look At How Uptier Priming Loan Exchanges Leave Excluded Lenders Behind, June 15, 2021
This report does not constitute a rating action.
| Primary Credit Analyst: | Hanna Zhang, New York + 1 (212) 438 8288; Hanna.Zhang@spglobal.com |
| Secondary Contacts: | Steve H Wilkinson, CFA, New York + 1 (212) 438 5093; steve.wilkinson@spglobal.com |
| Minesh Patel, CFA, New York + 1 (212) 438 6410; minesh.patel@spglobal.com | |
| Analytical Manager: | Ramki Muthukrishnan, New York + 1 (212) 438 1384; ramki.muthukrishnan@spglobal.com |
| Research Contributor: | Maulik Shah, Mumbai + (91)2240405991; maulik.shah@spglobal.com |
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