Distressed Debt Default Risks Increasing, Standard & Poor's Says

Risks of default in speculative-grade debt markets are increasing as companies seek more capital, according to Standard & Poor’s.

The U.S. distress ratio, a measure of the level of risk the market has priced into bonds, rose to 5.4 percent on Aug. 15, from 4.9 percent a month earlier, according to a report Friday from analysts at S&P led by Diane Vazza, head of global fixed income research. The ratio has climbed from a three-year low of 4.7 percent in May.

“A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe and sustained market disruption,” Vazza wrote.

Investors shifted into high-yield debt during the week ended Aug. 20 as yields on junk bonds reached the highest level in more than eight months. Mutual funds and exchange-traded funds that buy high-yield notes attracted $2.2 billion during the five-day period to record the biggest weekly inflow of 2014, according to data provider Lipper.

It was the second straight week of inflows after investors pulled $7.1 billion in the five days ended Aug. 6.

“The distress ratio has generally trended lower since the second half of 2012 as spreads have tightened,” according to the report.

S&P calculates the ratio by dividing the number of distressed securities by the total number of debt issues rated BB+ or lower. Distressed debt has a yield of at least 10 percentage points more than similar-maturity Treasuries, according to S&P.