Tag Archives: Distressed Debt

Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained” by Wolf Richter

Posted on February 26, 2016 | 1 comment

This article is not for the faint of heart. From Wolf Richter at wolfstreet.com:

“Distress” in Bonds Spirals into Financial Crisis Conditions

The pile of toxic corporate bonds in the US, euphemistically called “distressed” debt, ballooned 15% in the single month of February to $327.8 billion, up 265% from a year ago, according to S&P Capital IQ. The number of S&P rated US companies with distressed debt rose 9% in February to 353, up 128% from a year ago.

The last time the pile of distressed debt had soared to this level was in November 2008, and the last time the number of distressed issuers had shot up to these levels was in October 2008; Lehman had declared bankruptcy in September.

These “distressed” junk bonds sport yields that are at least 10 percentage points above US Treasury yields, according to S&P Capital IQ’s Distressed Debt Monitor. Put into a chart, the fiasco in terms of dollars (in billions, black line) and number of distressed issuers (purple columns) looks like this:

And so Standard & Poor’s US Distress Ratio for junk bonds soared to 33.9 in February, from 29.6 in January, having increased relentlessly for nine months straight, nearly tripling from a year ago!

The ratio hit the highest level since July 2009, when it was coming down from the Financial Crisis. But this is the spine-chilling part: Back in September 2008, before the Lehman bankruptcy had fully registered in the ratio, but when the Financial Crisis was already gaining a good amount of momentum, and when stocks were crashing left and right and prudent people were wearing hardhats while out on the sidewalk, the distress ratio was “only” 28.9:

The distress ratio measures the extent to which risk is being priced into the bonds. A rising ratio is “typically a precursor to more defaults,” the report explains.

And it’s not just the oil-and-gas and the minerals-and-mining sectors that are getting crushed. Of the 607 distressed bond issues in the ratio, 172, or 28%, are oil-and-gas related and 80 bond issues, or 13%, are minerals-and-mining related. The remaining 59% are spread across other the spectrum.

To continue reading: Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained”

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“Distress” in US Corporate Debt Spikes to 2009 Level, by Wolf Richter

Posted on December 3, 2015 | Leave a comment

A word to the wise (which includes SLL readers) is sufficient: credit markets always get the joke before the stock market). They’ve been the canary in the coal mine for the last two equity bear markets. From Wolf Richter at wolfstreet.com:

Investors bloodied as the Credit Bubble implodes at the bottom

Investors, lured into the $1.8-trillion US junk-bond minefield by the Fed’s siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied as these bonds are plunging.

Standard & Poor’s “distress ratio” for bonds, which started rising a year ago, reached 20.1% by the end of November, up from 19.1% in October. It was its worst level since September 2009.

It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from 225 companies in October with $166 billion of distressed debt, S&P Capital IQ reported.

Bonds are “distressed” when prices have dropped so low that yields are 1,000 basis points (10 percentage points) above Treasury yields. The “distress ratio” is the number of non-defaulted distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the next step and default, they’re pulled out of the “distress ratio” and added to the “default rate.”

During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put it, a “staggering” 70%. So this can still get a lot worse.

The distress ratio of leveraged loans, defined as the percentage of performing loans trading below 80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since the panic of the euro debt crisis in November 2011.

The distress ratio, according to S&P Capital IQ, “indicates the level of risk the market has priced into the bonds. A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe, sustained market disruption.”

And the default rate, which lags the distress ratio by about eight to nine months – it was 1.4% in July, 2014 – has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8% on November 30.

To continue reading: “Distress” in US Corporate Debt Spikes to 2009 Level

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