Capital Markets

Corporate Credit Takes Another Hit

Distress ratio surges past 3 percent.
Stephen TaubSeptember 26, 2007

Credit quality in the United States continues to erode, with the ratio of distressed corporate credit to non-distressed credit climbing still further in September after a big jump in August, according to Standard & Poor’s.

The percentage of distressed corporate bonds—those having option-adjusted spreads of more than 1,000 basis points relative to Treasuries—grew to 3.2 percent, up from 2.9 last month, S&P said. Before that, the level had been below 1 percent for five consecutive months.

“A rising distress ratio signals an increased need for capital and could act as a precursor to more defaults if accompanied by a market disruption,” S&P said a new report, adding that a peak in the distressed ratio typically precedes a peak in default rates by about nine months.

S&P asserted that the rising number of distressed issues is a result of the credit markets’ current volatility, which was triggered by heavy repricing across the board in July and August. The average spread on junk bonds moved up to 444 basis points on Sept. 13 from 427 on Aug. 15. The total number of rated companies with issues trading at distressed levels rose to 168, 20 more than reported in August.

As of Sept. 15, distressed issues across 13 sectors cumulatively affected debt worth $14.3 billion, up from $12.7 billion a month earlier, according to S&P. The media and entertainment sector accounted for 42 percent of that total, more than any other sector.

Meanwhile, distress in the leveraged-loan market also rose, breaking past 1 percent for the first time since November 2005, according to S&P. At the end of August (the latest data available), the share of performing loans trading at prices of less than 80 cents on the dollar increased to 1.17 percent from 0.63 percent a month earlier.