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S&P reports rising distressed ratio, turubulence could point to higher defaults
Pittsburgh, June 23 - Continued volatility in the bond market could create pressure points for distressed credits, Standard & Poor's said in a report.
According to the report, after a "lengthy term of benign conditions, rumblings of discontent are beginning to be felt in the U.S. bond market.
"Many of the factors that contributed to the bullishness in prior years - such as low inflation, surging corporate profitability and an accommodative monetary policy - are now poised to weaken from previous levels," S&P reported.
A rising distressed ratio would signal increased urgent need for capital by those most in need and potentially act as a precursor to higher defaults if accompanied by a credit crunch, according to the report.
The distressed ratio experienced a small decrease in June after two consecutive up ticks in April and May.
At 7.1%, the distressed ratio remains higher than the 7.0% average recorded during full-year 2004, but is still a fraction of the highs seen in 2000 and 2002.
Low distress levels are also mirrored in the leveraged loan market, where the percentage of performing loans trading below 80 remains near its all time lows.
In the bond market, weakness was centered in the transportation and telecommunications sectors, which together account for more than 40% of the total number of distressed issues.
Sectors that saw an increase in the share of distressed credits in mid- June were telecommunications and consumer products.
For the report, distressed credits are defined as speculative-grade rated issues that have option-adjusted spreads of more than 1,000 basis points.
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