Capital Markets

One in Four Junk Issues in Distress

The outlook is particularly bad for financial and media companies' debt.
Stephen TaubAugust 26, 2008

Credit quality among the shakiest companies is worsening. The Standard & Poor’s distress ratio jumped to 24.8 percent in August, meaning almost one in four junk bond issues are at a high risk of default.

Year to date, the distress ratio has expanded nearly 19 percent from last December’s level. The ratio is at its highest level since March 2003 and well above last August’s 2.9 percent. As recently as the first half of 2007, the distress ratio hovered at about 1 percent.

Looked at another way, the 12-month moving average has hit 13.8 percent, the highest level in 54 months.

Distressed credits are speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 basis points relative to Treasuries.

Meanwhile, speculative-grade spreads, on average, widened to 780 basis points on August 15 from 763 basis points one month earlier, according to S&P.

By debt volume, the financial and media and entertainment sectors are the most distressed. In the finance savings and loan sector, companies trading at distressed levels account for a stratospheric 91.8 percent of the speculative-grade debt, though there are just five issues from three companies with speculative-grade ratings.

Distress in leveraged loans has also increased, with the S&P/LSTA Leveraged-Loan Index distress ratio climbing to 15.1 percent in July from 12.7 percent in June.

S&P had noted that distress within leveraged loans had been declining for the previous three months but now is comfortably in the double-digit range after a 20-month period ending July 2007 when distress was below 1 percent.

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