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Credit Market PulseDecember 2017 | Issue 17
Editor’s NotePositive Improvement in Q3 2017
Despite a slight uptick in the first half of August, the probability of default (PD) for the S&P Global Broad Market Index (BMI) improved by almost 10% by the end of the quarter. This was fueled in large part by an impressive turnaround in the index for the Energy sector, which improved by nearly 50% over the quarter. An oil rally, caused by increasing demand and expectations that producers would extend output cuts, kept the price consistently above $52 per barrel in September.
Europe Struggles
The worst performing index for the third quarter was the S&P Europe BMI. This was impacted by numerous issues, including election concerns in Germany and ongoing Brexit negotiations, both of which will continue to create uncertainty in the region going forward.
In Germany, the inability to form a coalition government of the conservative CDU/CSU alliance, the pro-business FDP, and the environmentalist Green Party has created a thorny situation. This leaves investors wondering if there will be a coalition of Conservatives and Social Democrats, a minority government, or new elections. And, many difficult issues will be on the table as Brexit discussions focus on the type of relationship Britain will have with the EU, which accounts for 44% of its goods and services exports, once it has left the bloc.
Portugal also saw ups and downs. Over the quarter, uncertainty regarding the pace of the European Central Bank’s monetary stimulus and the bank’s policy outlook drove its market-implied credit risk up nearly 80% by early September. But, the country’s effort to bring down its budgetary deficit and spur economic growth helped the country recover, increasing its rating from S&P Global Ratings to investment grade by mid-September and slashing its market-implied credit risk by 61% during the last week of the quarter. Unease remains for 2018, however, as leftist parties supporting the socialist minority government push for more social security spending, raising concerns about the impact on austerity programs.
Asia Shows Mixed Results
China’s median market-implied credit risk saw continual improvement throughout the quarter, but tensions between North Korea and the U.S. continue to weigh on South Korea’s ability to stabilize its market-implied credit risk. As
Kim Jong-un persistently defies international sanctions put in place to halt Pyongyang’s weapons programs, and as rhetoric between the U.S. and North Korean governments increase, tensions will likely mount.
Brazil Tries to Move Past Slump
The Latin American index showed higher volatility for the quarter, but Brazil’s risk profile steadily improved. This may suggest investors are ready to move beyond the crisis that exposed a culture of systemic graft in Brazilian politics. A looming hurdle is the 2018 presidential election, however, where Brazilians are divided about whether the former president, convicted of corruption, should be allowed to run for office or imprisoned.
North America Pulls Through
The S&P North America BMI increased in August as investors took money out of U.S. equities and as the North Korea situation escalated. The index eventually improved at the close of the quarter as it became more likely that U.S. tax reform will pass through Congress in 2017 and that the legislation will usher in a very powerful tailwind for corporate earnings with a corporate tax rate cut. This could possibly help to promote the U.S. as an attractive location to maintain existing operations and future start-ups.
Consumer Discretionary Gets a Holiday Boost
Within the U.S., shopping hit its peak during the frenzied holiday season, during which retailers increasingly advanced the start of sales to try to win over consumers. Early indications from our PD Model Market Signals are that this period was viewed positively by the market, from a credit risk perspective. When focusing on U.S. benchmarks for retail-focused industries from Wednesday, November 22 to Tuesday, November 28, all six sub-sectors (Department Stores, General Merchandise Stores, Internet Retail, Computer & Electronics Retail, Apparel Retail, and Specialty Stores) had an improvement in median credit risk. Department & General Merchandise Stores improved by 15.8% and 14.1% respectively. The average one-year PD across these six industries was 1.54% on November 22 and improved to 1.39% on November 28.
We hope you enjoy this issue of Credit Market Pulse and we encourage you, as always, to provide us with your feedback and suggestions.
AUTHORS
James ElderDirector, Risk Services,S&P Global Market Intelligence
Eduardo S. F. AlvesDirector, Risk Services, S&P Global Market Intelligence
Melissa DoscherSenior Manager,S&P Global Market Intelligence
Regional Risk
Market-implied regional credit risk continued its relative stability throughout the third quarter of 2017, despite a slight uptick in risk in the first half of August. The S&P Global BMI started the quarter with a PD of 0.4%, increased to 0.46% in August, and then finished the quarter with a PD of 0.36% – almost a 10% improvement. The spike in August was largely due to increases in Asia Pacific, Europe, and North America. The index experienced a volatility of 0.04 during the period.
The best performing index was the S&P North America BMI, which improved by 34.91% over the quarter. The worst performing index was the S&P Europe BMI, which deteriorated by 9.26% over the same period, starting the quarter at 0.22% and finishing at 0.24%. Europe’s risk was impacted by the pre-German presidential election volatility, the ongoing Brexit negotiations, and uncertainty about the European Central Bank’s monetary policy and its impact on countries with lower credit standings.
Despite being the worst performer, the S&P Europe BMI was the most stable index, with a standard deviation of 0.03. In contrast, the S&P Latin America BMI was the most volatile, with a standard deviation of 0.13 through the quarter. It started the quarter with a PD of 1.04% and then improved to finish with a PD of 0.73%. The increase in volatility was a result of jumps in the index already observed in previous quarters. This was largely due to the impact that individual companies have on the index because of the smaller number of entities available.
The S&P North America BMI experienced a volatility of 0.06 during the quarter. It started with a PD of 0.32%, and then increased in August as investors pulled money from U.S. equities and as U.S.-North Korea military tensions continued to build. The index eventually improved to finish the quarter with a PD of 0.21% as the conversation around U.S. tax reform started to take shape. At the end of September, the region had the lowest market implied credit risk.
Chart 1:Regional Trends, Market Probability of Default
Source: S&P Capital IQ platform as of October 17, 2017.
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Political RiskBrazilDespite higher volatility in the Latin American index, Brazil showed a steady improvement in its risk profile, with a market-implied credit risk improvement of 58%, which contributed to the overall decrease in the regional index. Since its beginning in 2014, Operation Car Wash, a criminal investigation into alleged money laundering and widespread political corruption, has resulted in multiple high-profile arrests of both politicians and private sector moguls. The improvement in market-implied credit risk in the third quarter of 2017 might be a sign that investors are ready to move beyond the crisis. A looming hurdle is the 2018 presidential election, however, which could see Luis Ignacio Lula da Silva, the corruption convicted former president, attempt a return to office.
ChinaChina’s median market-implied credit risk demonstrated a persistent improvement throughout the quarter. It started July at 0.88% and finished September at 0.44% a 50% downward change despite rising regional political risk as a result of the U.S.-North Korea situation and fear of a credit bubble in the local market. This stability was undoubtedly welcomed by president Xi Jinping as he pursued another term in office at October’s China Communist Party general meeting. On September 21, S&P Global Ratings
downgraded China's credit rating, to 'A+' from 'AA-', citing the continued risk that credit poses to the private sector despite deleveraging efforts by the government.
PortugalThe quarter did not look promising for Portugal as uncertainty regarding the pace of the European Central Bank’s monetary stimulus and the bank’s policy outlook caused a bond selloff for lower-rated euro zone debt, including Portugal, Spain, and Italy. By early September, Portugal’s market-implied credit risk was up nearly 80%. However, the country’s effort to bring down its budgetary deficit and spur economic growth paid valuable dividends on September 15, when S&P Global Ratings announced Portugal’s return to the investment grade club, upgrading the sovereign rating to 'BBB-' from 'BB+'. As a result, Portugal’s market-implied credit risk was slashed by 61% in the last week of September.
South KoreaIncreased U.S.-North Korea military tensions continue to weigh on South Korea’s ability to stabilize its market-implied credit risk. As examined in S&P Global Market Intelligence’s November blog, titled ‘Global Credit Risk Spikes as Key APAC Countries Respond to the North Korean Threat’, North Korea’s 15 ballistic missile tests through October 2 negatively impacted global markets, including the U.S., Russia, and Japan. However, the effect has been most persistent for, South Korea.
United StatesIn a continuation from the previous quarter, the U.S. finished the third quarter of 2017 with a lower market-implied credit risk. It started the quarter with a PD of 0.55%, which deteriorated in mid-August to 0.72% before dropping to 0.4% by the end of September. Multiple positive and negative factors influenced this performance, including the start of discussions on the North American Free Trade Agreement, the ongoing strains with North Korea, ramifications from the withdrawal from the Paris Agreement, and expectations that American companies will be able to boost earnings as a result of corporate tax reform.
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Chart 2:Country Trends, Market Signal Probability of Default (July 1st, 2017 = 100 index)
Source: S&P Capital IQ platform as of December 8, 2017.
Industry Risk
As the median credit quality of the S&P Global Broad Market Index (BMI) improved by nearly 10%, to a one-year Market Signal PD of 0.36%, individual sectors were split with five improving and five declining.
Best PerformersThe best performing index was the S&P Global BMI Energy sector, which improved by nearly 50% over the quarter to a median Market Signal PD of 0.86%. This was a wide swing from the prior quarter’s experience, where energy deteriorated by nearly 40% as the worst performer.
Brent oil prices started the quarter at $48.77 and rose to as high as $58.43, closing the quarter at $56.79, an increase of more than 16%. This was the highest level for oil since November 2016, and the lowest level of risk for the sector since January 2017. This oil rally happened largely in September as investors looked for signs that the world’s largest oil producing countries were committed to solidifying compliance with their supply-cut deals with OPEC. In addition, oil-dependent Venezuela’s crude output had been consistently dipping throughout the quarter, finally falling below 2 million
barrels per day in October, its lowest level in nearly three decades.1 In terms of demand, Goldman Sachs Group Inc. announced in August that global oil-demand growth could be even higher than its projection of 1.63 million barrels a day earlier this year, after surprising strength in China and elsewhere during the second quarter.2
Consumer Discretionary (0.82%) and Materials (0.72%) also improved over the quarter, although more modestly than Energy. Energy still ranks as the riskiest sector for credit, however, closely followed by Consumer Discretionary, which is still being impacted by the distressed Retail market, and Materials, which has felt the effect of declining commodity prices.
Worst PerformersThe worst performing indices were the S&P Global BMI Consumer Staples and S&P Global BMI Health Care sectors, which deteriorated by 20.9% and 20.5%, respectively. A highly competitive environment, shift in consumer preferences, and evolving business models are just a few of the challenges affecting Consumer Staples. And, regulatory uncertainty coupled with fiscal policy concerns that could affect program funding have negatively impacted Health Care.
Volatility
In terms of volatility, the S&P Global BMI Health Care, Information Technology, and Utilities indices were relatively stable, with a standard deviation of 0.03. The S&P Global BMI Energy, with a standard deviation of 0.32, was the most volatile.
Financial Drivers
Looking at financial drivers compared to the third quarter of 2016, we see that the median Fundamental PD has improved by 9.08% to a PD of 0.62% versus 0.68%. Energy here has also improved by a large margin, with a median PD improvement of 29% year-over-year. This was eclipsed by the change in Financials, where the median risk level dropped by 60.48%. From a Fundamental perspective, Health Care is the riskiest sector at a median level of 1%. It was again the only deteriorating sector year-over-year with a PD level that increased by 6.85%.
S&P Global BMI Financials (Sector)
S&P Global BMI Consumer Discretionary (Sector)
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Chart 3:Industry Trends, Market Signal Probability of Default
Source: S&P Capital IQ Platform as of October 17, 2017.
1 Cawthorne, A., Parraga, M., & Ulmer., A. (2017, November 13). Venezuela crude output hits 28-year low: OPEC. Retrieved December 07, 2017, from https://www.reuters.com/article/us-venezuela-oil/venezuela-crude-output-hits-28-year-low-opec-idUSKBN1DD1QD
2 Grant, N., & Summers, J. (2017, August 06). Oil Holds Above $49 as Investors Look for More OPEC Compliance. Retrieved December 07, 2017, from https://www.bloomberg.com/news/articles/2017-08-07/oil-holds-gains-above-49-before-opec-talks-on-cut-compliance
Movers and ShakersConsumer Discretionary is the Story of the QuarterFourteen of the 18 highest PDs belong to the Consumer Discretionary sector. Every region had at least one firm from the sector on the list of riskiest firms, and every region except the Mid-East and Africa had two or more. The sector also included seven of the 18 firms that deteriorated the most, as well as five of the top improvers, highlighting its volatility.
The Sector’s Riskiest FirmsThe three riskiest firms sit within the Automobile industry. Honda Atlas Cars (Pakistan) Limited (KASE:HCAR) had a PD of 65.8% (implied credit score of ‘cc’). In addition, two South Korean Auto Parts and Equipment manufacturers—Seoyeon Co., Ltd. (KOSE:A007860) and Seoyon E-Hwa Co., Ltd. (KOSE:A200880)—had PDs of 47.8% (‘cc’) and 44.2% (‘cc’), respectively. Additional weakness for the industry was seen in South Korea with Pyeong Hwa Automotive Co., Ltd. (KOSDAQ:A043370) that had a PD of 42.9% (‘cc’), and in Mexico with Nemak, S. A. B. de C. V. (BMV:NEMAK A) that had a PD of 9.74% (‘ccc+’).
Specifically within South Korea, the Auto Parts and Equipment industry experienced a dramatic increase in risk over the third quarter.
Of the 100 public firms we track, the median level of credit risk rose to 11.63% from 4.57%, a 154% increase. This echoes a broader trend in South Korea over this timeframe, where the median level of credit risk for the country increased nearly threefold to 1.59% from 0.56%, exemplifying the geopolitical tensions in the region, including concerns about North Korea’s military provocations and the U.S.’s request that China put additional pressure on North Korea by cutting off energy exports.
Developments in Other SectorsAmongst the most significant decliners globally, Cineplex Inc. (TSX:CGX) saw its PD rise to 2.48% from 0.0036%, which is equivalent to falling to a ‘b+’ credit score from ‘aaa’. This was largely caused by a miss in earnings announced on August 2nd. As Cineplex attempts to diversify its business lines from movie theaters to other recreational activities, it is struggling to hit targets and its risk profile increased as a result.
On the positive side, one of the largest improvements was seen with Scripps Network, home to television stations including HGTV and The Food Network. The firm announced it was going to be acquired by Discover Networks for nearly $12 billion, after the company’s stock had been lagging for several months. Both Discover and Viacom were in discussions to acquire the media company.
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Chart 4:Annual Industry Changes, Fundamental Probability of Default
Source: S&P Capital IQ Platform as of October 17, 2017.
Region Highest Improved Deteriorated
S&P Global BMI
KASE:HCAR (cc) NasdaqGS:HUBG bb- -> aa- TSX:CGX aaa -> b+
Honda Atlas Cars (Pakistan) Limited
(65.80%) Hub Group, Inc. 1.51% -> 0.02% Cineplex Inc. 0.00% -> 2.48%
KOSE:A007860 (cc) NasdaqGS:SNI bb- -> aa- TSX:ITP aa -> b
Seoyeon Co., Ltd. (47.78%)Scripps Networks Interactive, Inc.
1.41% -> 0.02%Intertape Polymer Group Inc.
0.02% -> 3.76%
KOSE:A200880 (cc) NYSE:LYB bbb- -> aa+ NYSE:CMG aa- -> b+
Seoyon E-Hwa Co., Ltd. (44.16%)LyondellBasell Industries N.V.
0.45% -> 0.01% Chipotle Mexican Grill, Inc. 0.02% -> 2.94%
S&P North America BMI
NasdaqGS:BGFV (ccc-) NasdaqGS:HUBG bb- -> aa- TSX:CGX aaa -> b+
Big 5 Sporting Goods Corporation
(34.01%) Hub Group, Inc. 1.51% -> 0.02% Cineplex Inc. 0.00% -> 2.48%
NasdaqGM:WLB (ccc-) NasdaqGS:SNI bb- -> aa- TSX:ITP aa -> b
Westmoreland Coal Company
(32.02%)Scripps Networks Interactive, Inc.
1.41% -> 0.02%Intertape Polymer Group Inc.
0.02% -> 3.76%
NasdaqGS:FRED (ccc) NYSE:LYB bbb- -> aa+ NYSE:CMG aa- -> b+
Fred's, Inc. (21.88%)LyondellBasell Industries N.V.
0.45% -> 0.01% Chipotle Mexican Grill, Inc. 0.02% -> 2.94%
S&P Asia Pacific BMI
KOSE:A007860 (cc) TSE:7260 bb+ -> aa SEHK:1382 aa+ -> bb+
Seoyeon Co., Ltd. (47.78%) Fuji Kiko Co., Ltd. 0.64% -> 0.01%Pacific Textiles Holdings Limited
0.01% -> 0.55%
KOSE:A200880 (cc) TSE:3197 bb+ -> aa KOSE:A020560 bbb- -> ccc
Seoyon E-Hwa Co., Ltd. (44.16%) Skylark Co., Ltd. 0.74% -> 0.01% Asiana Airlines, Inc. 0.32% -> 19.07%
KOSDAQ:A043370 (cc) TSE:8058 bb -> aa- ASX:ALL aa -> bbb-
Pyeong Hwa Automotive Co., Ltd.
(42.91%) Mitsubishi Corporation 0.85% -> 0.02% Aristocrat Leisure Limited 0.01% -> 0.50%
S&P Europe BMI
BME:CDR (ccc) OM:SCA B b+ -> a LSE:RB. aaa -> bbb-
Codere, S.A. (21.12%)Svenska Cellulosa Aktiebolaget SCA (publ)
3.23% -> 0.05%Reckitt Benckiser Group plc
0.00% -> 0.40%
LSE:TNI (ccc+) SWX:VIFN bb+ -> aa- OM:HLDX aa -> bb+
Trinity Mirror plc (15.08%) Vifor Pharma AG 0.54% -> 0.02% Haldex AB (publ) 0.01% -> 0.57%
BME:PRS (ccc+) OB:NHY bb -> a+ LSE:CPG aa -> bbb-
Promotora de Informaciones, S.A.
(14.70%) Norsk Hydro ASA 1.02% -> 0.03% Compass Group PLC 0.01% -> 0.36%
S&P Latin America BMI
NYSE:NETS (ccc+) BOVESPA:CSNA3 ccc+ -> bb+ BMV:ALFA A bb+ -> b+
Netshoes (Cayman) Limited
(13.03%)Companhia Siderúrgica Nacional
12.16% -> 0.81% Alfa, S. A. B. de C. V. 0.66% -> 3.08%
BMV:NEMAK A (ccc+) SNSE:CENCOSUD bb -> a BMV:VOLAR A bb+ -> b+
Nemak, S. A. B. de C. V. (9.74%) Cencosud S.A. 0.84% -> 0.06%Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
0.56% -> 2.34%
BOVESPA:LIGT3 (b-) BOVESPA:VVAR3 b- -> bb+ BOVESPA:LIGT3 bb- -> b-
Light S.A. (6.50%) Via Varejo S.A. 7.55% -> 0.63% Light S.A. 1.92% -> 6.50%
S&P Mid-East and Africa BMI
JSE:GRF (ccc) JSE:ARI b -> bb+ DFM:ARTC bbb- -> b
Group Five Limited (24.92%)African Rainbow Minerals Limited
5.78% -> 0.77% Arabtec Holding PJSC 0.48% -> 4.25%
JSE:AEG (ccc) JSE:GND b- -> bb DSM:QATI bbb -> bb
Aveng Limited (19.28%) Grindrod Limited 6.59% -> 0.91%Qatar Insurance Company S.A.Q.
0.19% -> 1.02%
JSE:SUI (ccc+) JSE:MSM b- -> bb DFM:DAMAC a -> bbb
Sun International Limited (13.12%)Massmart Holdings Limited
6.43% -> 1.03%Damac Properties Dubai Co. PJSC
0.04% -> 0.22%
Table 1:Movers and Shakers
Source: S&P Global Market Intelligence as of October 17, 2017.
S&P Global Ratings Trends
Ratings MigrationA total of 288 issuers migrated during the third quarter of 2017, showing less movement in the rated universe versus the second quarter, but more negative trends. Of these movers, 123 issuers were upgraded, while 165 others were downgraded. The upgrade-to-downgrade ratio slipped during this quarter. It tracked 0.69, 0.93, 0.95, and 0.65 during the past four quarters, and is now moving further from parity versus the last two quarters.
Firms on CreditWatchLooking forward, the overall positive/negative ratio of firms on CreditWatch/Outlook remained unchanged at 0.47. The foundation of this stability was the improvement in the Ratings Outlook ratio, which rose to 0.47, up from 0.4 in the second quarter of 2017. However, the shorter-term CreditWatch ratio deteriorated to 0.5 in the third quarter from even in the second quarter. These changes were driven by a 1% increase in firms on Outlook Positive, at 7%, and a 1% decrease in
firms on CreditWatch Positive, now at 1%. These changes negated each other overall, leaving the positive/negative ratio unchanged.
These trends corroborate the slowdown in upgrades within the rated universe, implying that shorter-term positive momentum is limited, and upgrades in the last quarter of 2017 may also be more muted than prior quarters.
Ratings DistributionThe current ratings distribution remains consistent with recent quarters. A total of 35.5% of firms were rated Investment Grade (‘BBB-’or higher) resulting in an investment grade-to-noninvestment grade ratio of 0.55x, slightly lower than 0.56x in the second quarter. Notably, the number of ‘AAA’ rated firms declined from 9 to 5. This is directly tied to the downgrades of the People’s Republic of China and Hong Kong in September. There are now 101 more firms in the ‘B’ ratings category (inclusive of +/- notches). This keeps ‘B’ as the most popular rating level, which now has more than 20% of all rated industrials, 1% higher than last quarter.
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Source: S&P Global Market Intelligence as of October 17, 2017.
Chart 6:Ratings Migration
Source: S&P Global Market Intelligence as of October 17, 2017.
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Source: S&P Global Market Intelligence as of October 17, 2017.
Company Name Rating Default Date
Bankruptcy Date
Country Total Assets ($USD MM)
Primary Industry
SeaDrill Limited 9/12/17 Bermuda 21,305 Oil and Gas Drilling
Toys "R" Us Inc. 9/18/17 United States 6,924 Specialty Stores
Hornbeck Offshore Services Inc. 8/9/17 United States 2,846 Oil and Gas Equipment and Services
J. Crew Group Inc. 7/12/17 United States 1,477 Apparel Retail
Global A&T Electronics Ltd. 8/8/17 Singapore 1,309 Semiconductors
Norske Skogindustrier ASA 7/18/17 Norway 1,196 Paper Products
Quintis Ltd. 8/31/17 Australia 1,161 Forest Products
Tops Holding II Corp. 8/10/17 United States 1,006 Food Retail
MIE Holdings Corp. 8/28/17 Cayman Islands 871 Oil and Gas Exploration and Production
Boart Longyear Ltd. 9/1/17 United States 699 Construction and Engineering
Quarterly Default Review
A total of 112 companies either defaulted or declared bankruptcy in the third quarter of 2017.
Once again, Energy was the sector with the most defaulted assets, summing $253.4 million (64.6% of the total), followed by
Consumer Discretionary with $84 million (21.4% of the total), and then Materials with $24.8 million (6.3% of the total).
On an industry view, Oil and Gas Drilling had the most defaulted assets with $213.1 million (54.3% of the total), followed by Specialty Stores with $69.2 million (17.6% of the total), and then Oil and Gas Equipment and Services with $28.5 million (7.3% of the total).
Of these 112 companies, 78 have data available for the year in which they were founded. The distribution of bankruptcies by company age is illustrated above, showing that: 18 were less than 10 years old, 43 were between 10 and 30 years old, and 17 were older than 30 years old. We observe that companies older than 10 years old defaulted or declared bankruptcy at a rate 3x higher than younger ones – a trend also observed during previous quarters.
Table 2:2017 Q3 Defaults, Selective Defaults, and Bankruptcies
Source: S&P Capital IQ platform as of December 8, 2017.
Source: S&P Capital IQ platform as of December 8, 2017.
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Chart 8:Defaults by Company Age and Sector
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Single-Entity Default Analysis
Norske Skogindustrier ASA (“Norske Skog”) was founded in 1962 and is headquartered in Skoyen, Norway. Together with its subsidiaries, it produces and sells newsprint paper, magazine paper, and book and directory papers under the Nor brand. It operates through two segments, Publication Paper Europe and Publication Paper Australasia.
The company’s earning potential from its core publication paper business has been limited due to the segment’s overcapacity, and further hampered as an indirect result of India’s unexpected demonetization on November 2016. Though the company has plans to increase earnings from other sources, this would require significant additional investments. In 2015 and 2016, the company went through two financial restructurings, resulting in a smaller debt burden, with the exception of EUR 290 million senior secured notes due in December 2019. However, its capital structure is seen as unsustainable.
In March of this year, the company announced unsuccessful discussions with investors regarding a debt-to-equity swap. In June, S&P Global Ratings downgraded its foreign-currency long-term rating to ‘CC ‘as the company launched a debt exchange offer covering 93% of its capital structure. This offer was viewed as a distressed exchange that amended the terms of the company’s senior secured notes and proposed to convert all of its senior unsecured bond debt to equity. A standstill agreement with creditors was announced, suspending coupon payments on its senior secured notes beyond the 30-day contractual grace period and, as a result, the company’s rating was downgraded to ‘SD’ (selective-default) on July 18. From a quantitative perspective, the one-year market-based PD has averaged 24% over the course of 2017, illustrating agreement in the distressed viewpoint of the firm. PD Market Signals rose to nearly a 40% one-year PD in May, the month before the firm’s distressed exchange.
3/1/2
017
3/15/2
017
7/30/2
017
5/24/2
017
6/7/2
017
6/21/2
017
7/5/2
017
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017
5/10/2
017
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017
4/12/2
017
3/29/2
017
AAA
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AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
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CC
C
R
SD
D
NR0
20
40
60
80
100
Norske Skogindustrier ASA (OB:NSG) - PD Market Signal - Sovereign Capped 1 Year PD
Issuer Credit Rating
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Chart 9:Norske Skogindustrier ASA (OB:NSG) – Early Warning Default Indicator
Source: S&P Capital IQ platform as of December 8, 2017.
Single Entity Recovery Analysis
Taking the above mentioned EUR 290 million senior secured notes as an example, it is possible to estimate the range of potential losses to creditors using the S&P Global Market Intelligence LossStats™ Model. On February 9, 2015, Norske Skog issued senior secured corporate debentures at EUR 97.5, fixed 11.75% coupon, and a maturity date of December 15, 2019.
Applying a set of standardized assumptions about the performance of senior secured notes, Norway’s country default rate, a euribor yield spread of 1.45%, and a hypothetical debt above class of 5% and debt below class of 80%, the expected loss for this transaction is EUR 46.5 million, which is equivalent to a loss given default (LGD) of 25%. Furthermore, the probability distribution of losses illustrated below shows that there is 90% confidence that LGD will be less than 57.5%.
Figure 1:Norske Skogindustrier ASA Senior Secured Notes: Sample Recovery Analysis
Source: S&P Capital IQ platform as of December 8, 2017.
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