Distressed Finance Sector Junk Bonds at Stratospheric Level
Led by a “stratospheric” finance sector, distressed junk bond issues have risen to their highest level in more than five years, according to Standard & Poor’s.
Distressed credits are speculative-grade rated issues that have option-adjusted spreads of more than 1,000 basis points (bps) relative to Treasuries.
Following on the heels of last month’s 10% increase, the Standard & Poor’s distress ratio has advanced again to 24.8%. In the year to date, the distress ratio has expanded nearly 19% from December’s level. The distress ratio is at its highest level since March 2003, and the 12-month moving average has hit 13.8%. This increase runs alongside the recent rise in speculative-grade spreads, which were at 780 bps on Aug. 15 from 763 bps a month earlier.
By debt volume, the finance companies and media and entertainment sectors take the lead, each accounting for just under $100 billion (60.4%) of the total. When looking at the distress ratio based on outstanding debt however, the finance savings and loan sector is at a stratospheric high of 91.8%.
This means that nearly 92% of the speculative-grade debt in this sector is attributable to companies trading at distressed levels.
S&P noted that only five issues attributable to three firms within this sector possess speculative-grade ratings. 
Alongside the recent expansion within the corporate universe, distress in leveraged loans has also increased, with the S&P/LSTA Leveraged-Loan Index distress ratio moving to 15.1% in July from 12.7% in June. 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 as recently as July 2007 where distress was below 1%.
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