Distressed debt balloons to almost $1 trillion, nears 2008 peak

The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries worldwide.

In total, the tally has ballooned to $934 billion of U.S. corporate bonds that yield at least 10 percentage points above Treasuries and loans that trade for less than 80 cents on the dollar, according to data compiled by Bloomberg. That's nearly double the amount from less than a week ago.

The total is probably even higher, because the calculation excludes debt of small- to medium-sized companies whose loans trade rarely, if at all.

The coronavirus pandemic has caused the worst sell-off since the global financial crisis and deepened stress in credit markets. Driven by some of the lowest oil prices since the early 2000s, the amount of distressed bonds has surged to the highest level since April 2009.

"What we are seeing now is fast and violent," unlike the gradual sell-off in the 2007 and 2008 crisis, said Phil Brendel, a senior distressed credit analyst at Bloomberg Intelligence. If the virus isn't suppressed, even more distress is possible, according to Mr. Brendel. "The worst is yet to come."

Distressed debt describes the borrowings of companies that are perceived to be under significant financial pressure, and often suggests there's considerable risk that the debtholders won't get paid everything they're owed.

As a global recession looms and businesses remain under forced closures, more issuers are likely to end up in similarly dire situations.

Washington struck a deal overnight on a rescue package worth about $2 trillion in spending and tax breaks to bolster the U.S. economy and fund a nationwide effort to stem the coronavirus.

The size of the stimulus package would be historic, dwarfing the approximately $800 billion Obama stimulus that passed five months after the 2008 financial crash.

The fiscal lifeline may not be enough if the government can't also combat the global health crisis, Mr. Brendel said. "Unless the pandemic is controlled, consumers and businesses will look to save the money they're given and spend it only on necessities," he said.

Most of the distressed debt outstanding stems from U.S. energy companies battered by less travel demand and an all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, suddenly faces the prospect of deeper losses after oil plunged below $20 a barrel. Last month, it traded above $50.

What's more, the fiscal stimulus plan excludes $3 billion sought by the Trump administration to buy oil to fill the Strategic Petroleum Reserve, which might support the price.

The amount of distressed debt tied to the oil and gas sector stands at over $161 billion, up from $128 billion a week ago. One of the biggest casualties has been Occidental Petroleum Corp., which has seen its funding costs skyrocket and its credit rating cut to make it the biggest fallen angel in the current downgrade cycle. Oxy's bonds led the list of high-yield losers on Wednesday, with four of its issues among the top 10 decliners.

Energy isn't alone. Every sector except utilities is under stress, with distressed ratios growing by double or triple digits. Telecommunications, retail, entertainment and healthcare industries make up the bulk of distressed debt. Retailers such as Neiman Marcus Group and theater chains such as AMC Entertainment Holdings have been hit hard as companies are forced to close and customers are told to stay home.

Distress in the automotive industry also jumped as consumers decide to cancel travel and stay put. Even investment-grade giants are at risk. Ford Motor Co. now makes up one of the largest issuers with debt tumbling to distressed levels, with a dozen issues hovering near or below 75 cents on the dollar.

U.S. junk bonds entered distressed territory for the first time since the global financial crisis after spreads on the securities topped 1,000 basis points at the end of last week. The index move marks a period of turmoil in the credit markets as investors flee funds that buy all types of corporate debt.

Investors with an eye on troubled assets have been waiting for a surge in distress after years of easy lending and low interest rates made potential targets scarce.

Apollo Global Management, one of the largest and most aggressive investors in the credit market, is tracking more than 250 potential opportunities to scoop up distressed assets. Oaktree Capital Management, led by Howard Marks, is planning a new distressed-debt fund.

The dislocation of valuations in the leisure and travel sector has presented an opportunity that arises only once every 12 or even 50 years, according to Apollo partner David Sambur. "We're very excited about it," he told limited partners Tuesday during a private briefing.