Tuesday, February 19, 2008
Distress Ratio of HY Bonds Rose
--More than one in five high-yield U.S. corporate bonds are now considered distressed, about the same ratio as in the months preceding a recession that began seven years ago, according to Merrill Lynch & Co. --The percentage of speculative-grade bonds that are distressed, meaning they have yields of at least 1,000 basis points more than benchmark rates, rose to 20.9 percent as of Feb. 15, Merrill Lynch analysts led by Christopher Garman in New York said today in a report. A basis point is 0.01 percentage point. --Real estate, paper, publishing, gaming and retail companies account for 40 percent of distressed companies, according to the report, as the worst home sales market since 1981 slows the U.S. economy and banks restrict lending to high-risk borrowers. High- yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. ``With distress normally leading defaults by about three quarters, we might expect to see a 7.1 percent reading on Moody's global issuer scale by October 2008 based solely on this relationship,'' the analysts wrote. The last recession started in March 2001 and lasted until that November, according to the National Bureau of Economic Research. The U.S. distress ratio is close to levels from the third quarter of 2000, the Merrill Lynch analysts said. Asia is the most distressed region, with 28.4 percent of bonds offering spreads of more than 1,000 basis points, according to the report. In Europe, 26.5 percent of bonds are distressed. Default Rate Forecast The default rate for high-yield bonds will rise ninefold this year from 2006, according to a report Feb. 6 from Edward Altman, the New York University professor who created the Z-score mathematical formula that measures a company's bankruptcy risk. Altman predicted 4.64 percent of the $1.1 trillion in junk bonds outstanding will default this year, up from 0.51 percent at the end of 2006. The December 2001 failure of Houston-based energy trader Enron was the biggest bankruptcy to date. It sparked an 11.2 percent annualized default rate the following month, according to New York-based Moody's. Spreads reached 11.2 percentage points in October 2002, the highest since at least 1996.