WASHINGTON (AFX) - The ranks of U.S. businesses in serious financial trouble dwindled to an eight-year low in August, as easy credit helped them cope with rising energy prices and slower economic growth, Standard & Poor's said in a new report.
The credit-rating agency said the ratio of 'distressed' corporate debt to all non-investment-grade debt shrank to 3.1 percent -- the lowest level since April 1998. S&P considers debt to be distressed when it carries yields greater than 10 percentage points above the 10-year Treasury note -- or 14.79 percent as of Friday.
S&P attributed the decline in part to the easy availability of credit, saying 'abundant liquidity' helped many companies avoid defaults. Bank lending to businesses has remained brisk despite 17 interest-rate increases by the Federal Reserve since 2004. Moreover, some investors -- including hedge funds and private-equity firms -- have remained eager to invest in troubled companies.
Still, S&P said it expects default rates among speculative-grade bonds to climb slowly over the next year or so. That rate, which averaged 1.9 percent during the last four quarters, is expected to reach 2.4 percent by the end of 2006, and 2.8 percent over the next four quarters.
'Concerns for an increase in defaults in 2007 and beyond remain,' S&P said. S&P's rival, Moodys Investors Service, also has predicted a gradual increase in default rates. Many corporate restructuring experts have predicted a rebound in their business over the next year or so.
For now, however, S&P said the conventional gauges of financial distress haven't worked well as predictors of defaults. Because the universe of companies fitting the conventional definition of 'distressed' has been so small, S&P recently lowered the threshold. It now also looks at companies whose debt trades at more than six percentage points above the Treasury note.
When those thresholds were lowered, 'the retail/restaurant segment emerged as a new potential source for distressed credits,' S&P said.
Distressed companies in that category included New York pharmacy chain Duane Reade Inc.; and Vicorp Restaurants Inc., which operates Village Inn and Bakers Square restaurants. The debt of those companies trades around 8 percentage points above the Treasury note, S&P said.
Still, distressed debt tends to be concentrated in the telecommunications, automotive and transportation industries, S&P said.
The distress ratio for the telecommunications sector, with nearly $2.2 billion in affected debt, was 9.4 percent in August. The ratio for the automotive industry, with $1.4 billion in affected debt, was 8 percent. The ratio for the transportation industry, with $105 million in affected debt, was 4.3 percent.
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