S&P distress ratio hits five-year high of 22.2% in March; junk bond spreads jump 50 bps

By Caroline Salls

Pittsburgh, March 24 - Standard & Poor's distress ratio jumped to 22.2% in March from 16.9% in February, its highest ratio since April 2003, according to a report published Monday.

S&P said the increase in the distress ratio accompanies the continued widening in speculative-grade bond spreads, which rose nearly 50 basis points in a month's time to 763 bps on March 13 from 714 bps on Feb. 15.

According to the agency, much of this month's expansion in the distress ratio can be attributed to more than $39.5 billion of senior unsecured issues backed by GMAC LLC and Ford Motor Credit Co.

In February, only one issue from GMAC LLC at $2 billion was trading at distressed levels, while S&P said the two companies currently have a combined 32 issues trading with spreads over 1,000 bps relative to Treasuries.

In addition, S&P said the leveraged-loan market had a rapid advance in its distress ratio, nearly doubling to 13.7% from 6.9% in January. S&P said this is the highest monthly reading since January 1997 "and is one more indication of the overall stress in the credit markets."

S&P also reported that at least one-quarter of all speculative-grade rated securities in eight non-financial sectors are now trading at distressed levels, with the media and entertainment sector leading the way at over 32%.

Among distressed bonds, S&P said the total number of rated companies with issues trading at 1,000 bps and higher is currently 189.

Firms with issues trading at severely distressed levels, defined specifically as securities trading at least 3,500 bps over comparable Treasuries, on March 13 included Finlay Fine Jewelry Corp., Majestic Star Casino LLC, Fremont General Corp., Caraustar Industries Inc., Uno Restaurant Holdings Corp., Metaldyne Corp., American Media Operations Inc., Vertis Inc. and Vicorp Restaurants Inc.

Two-thirds of these companies are from the retail/restaurants and media and entertainment sectors, according to the report.

As of March 13, S&P said distressed issues cumulatively affected debt worth $142 billion, nearly $38 billion higher than in February. Based on debt volume, the finance company and media and entertainment sectors had the largest exposures, constituting 29% and 28% of total debt affected, respectively.

Of the 189 companies on this month's distressed list, the agency said 56% had either negative outlooks or ratings on CreditWatch with negative implications.

Volatility hits all sectors

S&P said the continued tightening of credit conditions, which began in mid-summer of 2007, has accelerated in earnest with the recent widening of spreads since the beginning of 2008, despite the Federal Reserve's multiple attempts to ease credit conditions within the U.S.

Additionally, S&P said market volatility and a dearth of lending has hit all sectors, with even investment-grade spreads hitting record levels.

Amid this volatility, S&P said the U.S. speculative-grade default rate - typically, the last indicator of stress within a credit cycle - has started to rise off of its all-time lows at the end of 2007 to reach 1.21% in February.

Over the next several months, S&P said it expects the trajectory of default rates to escalate based on changes in the credit-pricing environment, as well as a slowing economy. The agency said its baseline forecast is for a 2008 year-end speculative-grade baseline default rate of 4.6% in the United States, with a high forecast of 5.7% and low of 3.4%.

Meanwhile, S&P reported that corporate defaults are on the upward leg of an ascent that will pick up momentum in the second half of 2008 and likely continue into 2009, and there is still a risk that defaults could be significantly more pronounced and severe beyond the one-year forecast horizon.

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