Plummeting oil and gas prices pushed the percentage of junk bonds trading at distressed levels to the highest since the markets were recovering from the financial crisis, according to Standard & Poor’s.
The ratings firm’s so-called distress ratio increased to 20.1 percent in November, up from 19.1 percent in October and the most since September 2009, when it hit 23.5 percent. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding.
“The oil and gas sector accounted for 113 of the 361 issues in the distress ratio, because drops in oil prices affected profitability for oil and gas companies, where spreads have widened considerably, and had a spillover effect to the broader speculative-grade spectrum,” Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group, said in a report.
The distress ratio, along with other economic, financial and credit conditions, indicates “growing pressure” that the number of defaults might rise, according to the report. In the third quarter of 2015 spreads remained elevated, while defaults grew to 2.71 percent as of Oct. 31 from 1.61 percent a year earlier, according to data provided by S&P.
“We believe companies with distressed bond spreads are at a higher risk of default if they are unable to borrow or are only able to borrow on unfavorable terms,” Vazza said in the report.
Borrowers with debt trading at distressed levels currently have about $167 billion of bonds that mature between 2016 and 2022, according to the report. S&P defines distressed as debt with a yield of at least 10 percentage points more than similar-maturity Treasuries.