Continuing its descent in 2009, Standard & Poor’s distress ratio has hit another low this year, reaching 23.5% as of Sept. 15, down from 25.3% in August. The decrease in distress is coincident with movement in corporate bond spreads. Distressed credits are speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 basis points (bps) relative to Treasuries.
Highlights from this month’s distressed credit report are:
- The bank, insurance, media and entertainment, and high technology sectors are posting distress ratios in excess of their traditional, issue-based distress measures.
- Following alongside the recent activity in the corporate universe, distress in leveraged loans has experienced a slight decrease as well, with the S&P/LSTA Leveraged Loan Index distress ratio falling to 31.1% in August from 34% in July.
- Among distressed bonds, the total number of companies with issues trading with spreads of 1,000 bps and higher is currently 193, down from 208 in August.
With distress still at elevated levels, recovery prospects remain low.
- In September, 72% of all distressed issues fall into the lowest rating categories (’5′ or ‘6′), indicating only negligible to modest recovery in the event of default. In addition, 85% of all distressed issues are either unsecured or subordinated notes. Holders of those notes have claims to a firm’s assets that are secondary to more senior debtholders in the event of default.
- With a decrease in the distress ratio, the amount of affected debt also fell to $101.9 billion from $116.4 billion in August. Based on debt volume, the finance companies, media and entertainment, and high technology sectors together accounted for 52.2% of the total debt outstanding.
