U.S. Distress Ratio Drops for First Time Since May '15, S&P Says

The percentage of junk bonds trading at distressed levels in March dipped for the first month since May 2015 amid a rebound in oil prices and improved unemployment figures.

One in four speculative-grade securities were trading at distressed levels as of March 15, compared with one in three at Feb. 15, according to Standard & Poor’s so-called distress ratio. The ratings firm defines distressed debt as carrying a yield of at least 10 percentage points more than similar-maturity Treasuries and said that borrowers with debt trading at those levels have about $201 billion of outstanding bonds maturing between 2017 and 2023.

“An uptick in oil prices, an easing in unemployment rates and market participants looking at the possibility of fewer rate hikes this year were all contributing factors to a hiatus in volatility that tightened spreads, and distress has been pulled in line with that,” said Diane Vazza, head of S&P’s global fixed income research group.

Still, despite the decline S&P cautioned that the ratio remains “historically high.” Vazza said that commodities-related companies were the “biggest drivers of distress.”

S&P’s distress ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade issues. An increase in the figure indicates that defaults could rise.

Oil and gas companies constituted a smaller portion of the ratio than in the previous month, with just 128 distressed issues in March compared with 172 in February out of a total of 438 issues, according to a report by S&P. However, oil and gas was the most distressed sector at 63.1 percent, with metals and mining next at 60.6 percent, according to the report.

Borrowers with debt trading at distressed levels currently have about $201 billion of outstanding bonds scheduled to mature between 2017 and 2023, according to the report.

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