{"id":13283,"date":"2015-10-12T09:03:00","date_gmt":"2015-10-12T14:03:00","guid":{"rendered":"http:\/\/olduvai.ca\/?p=13283"},"modified":"2015-10-12T09:03:00","modified_gmt":"2015-10-12T14:03:00","slug":"junk-bond-issuance-collapses-distress-ratio-spikes","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=13283","title":{"rendered":"Junk Bond Issuance Collapses, \u201cDistress Ratio\u201d Spikes"},"content":{"rendered":"<h3 class=\"entry-title\"><a href=\"http:\/\/wolfstreet.com\/2015\/10\/12\/junk-bond-issuance-collapses-distress-ratio-spikes\/\" target=\"_blank\">Junk Bond Issuance Collapses, \u201cDistress Ratio\u201d Spikes<\/a><\/h3>\n<p>Fitch Ratings is fretting about junk-bond defaults. \u201cAfter five issuer defaults already this month accounting for nearly $2 billion in new volume,\u201d\u00a0<a href=\"https:\/\/www.fitchratings.com\/site\/fitch-home\/pressrelease?id=992054\" target=\"_blank\"><u>Fitch<\/u><\/a>\u00a0now expects that the default rate will hit 3.5% by year-end, up from 2.5% to 3% a few days ago. Through September, the trailing 12-month default rate was already 2.9%.<\/p>\n<p>Worse: a 4% default rate by year end is \u201cmore likely\u201d than a 3% default rate. And it\u2019s \u201cset to rise further in 2016.\u201d<\/p>\n<p>In non-recessionary periods, the default rate averages 2%. During recessionary periods it averages 11%. That\u2019s why recessions are terrifying for junk-bond holders. Junk bonds are called \u201cjunk\u201d for a reason.<\/p>\n<p>We\u2019re not there yet. But the energy and metals &amp; mining sectors are getting there: in September, their default rates were 5% and 10% respectively. Fitch: \u201cThese sectors experienced three consecutive months with over $4 billion in defaults, a level not seen since 2009 when monthly volume in the entire market exceeded $4 billion for seven straight months.\u201d<\/p>\n<p>There is a period before default when investors are picking up on the troubles the company is having and demand higher yields in return for taking on the risks. Debt is considered \u201cdistressed,\u201d when the spread between its yield and the yield of US Treasuries surpasses 10 percentage points.<\/p>\n<p>The toxic miasma of \u201cdistressed debt\u201d is engulfing more and more junk bonds and leveraged loans. Back on September 24, Standard &amp; Poor\u2019s announced that the \u201cdistress ratio\u201d for junk bonds, after rising since late last year, hit 15.7%. It was the worst level since December 2011. It was terrible. But now, the distress ratio for junk bonds has soared to 21%.<\/p>\n<p>This chart from\u00a0<a href=\"http:\/\/www.highyieldbond.com\/\" target=\"_blank\"><u>LCD HY Weekly<\/u><\/a>\u00a0shows the distress ratio of junk bonds (red line) and of leveraged loans (blue line). Leveraged loans are generally secured by collateral and hold up better in bankruptcy than bonds, so their yields remain lower even if unsecured bondholders are headed for a total wipeout. Now the distress levels of both are soaring:<\/p>\n<p><a class=\"image-anchor\" href=\"http:\/\/wolfstreet.com\/wp-content\/uploads\/2015\/10\/US-distress-ratio-bonds-leveraged-loans-2015-10-09.png\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-18545 size-full\" src=\"http:\/\/wolfstreet.com\/wp-content\/uploads\/2015\/10\/US-distress-ratio-bonds-leveraged-loans-2015-10-09.png\" alt=\"US-distress-ratio-bonds-leveraged-loans-2015-10-09\" width=\"509\" height=\"400\" \/><\/a><\/p>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Junk Bond Issuance Collapses, \u201cDistress Ratio\u201d Spikes Fitch Ratings is fretting about junk-bond defaults. \u201cAfter five issuer defaults already this month accounting for nearly $2 billion in new volume,\u201d\u00a0Fitch\u00a0now expects that the default rate will hit 3.5% by year-end, up from 2.5% to 3% a few days ago. Through September, the trailing 12-month default rate [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[9540,200,9794,2577,1297,4254,4255],"class_list":["post-13283","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bond-default","tag-default","tag-distress-ratio","tag-fitch-ratings","tag-junk-bonds","tag-wolf-richter","tag-wolfstreet"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13283","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13283"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13283\/revisions"}],"predecessor-version":[{"id":13284,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13283\/revisions\/13284"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}