Search this website. You can use fund codes to locate specific funds

Weekly Credit Insight: distress ratios on the rise

Chart of the week: distress ratios on the rise

The global economy is flagging. The US-China trade war has pushed down Purchasing Managers’ Index readings and fragile fundamentals have depressed earnings across sectors, many of which also face structural challenges. This has limited access to capital for issuers that have more uncertain outlooks and do not have the levers to respond to increased external volatility.

Because of this, the distress ratio1 – one of the measures used to forecast future defaults and expected volatility – remains elevated across the global high-yield market. Figure 1 shows how distress ratios have risen in the US, Europe and emerging markets over the past three years.

Figure 1: Distress ratios rise 

Source: Herme Credit, ICE bond indices, as at December 2019.

A lower distress ratio in Europe can be explained in part by the fact that it has less exposure to the energy and pharmaceutical industries, which have both faced challenges this year. Credit quality is also higher on average in Europe, with CCC-rated instruments making up a much smaller part of the market. In addition, there has been stronger demand for high yield ever since the Corporate Sector Purchase Programme restarted.

Conversely, a slightly higher distress ratio in emerging markets can be explained by turmoil in countries like Argentina. Moreover, emerging-market high yield tends to trade 150bps wider than US high yield.   

Next year will likely see a heightened focus on fundamentals, meaning that bottom-up research and the ability to take a top-down view of global credit markets will be as important as they have been over the last 18 months. To hear more about our outlook for credit markets in 2020, listen to our Delta podcast.

  1. 1The share of bonds trading about 800bps, a level where in the majority of cases it is not sustainable to raise debt.

More Insights

The geometry of net zero: an accounting conundrum waiting to happen
Emissions accounting is often inconsistent, inaccurate and imply that climate change can be reduced to a book-balancing process.
2020 TCFD report: our climate-related financial disclosures
This report details our approach to identifying and managing climate risks.
Your Questions Answered by Unconstrained Credit
A quarterly series featuring the top 10 questions that clients and prospective clients ask our investment teams.
Sustainable oceans in focus in EOS’s Q2 Public Engagement Report
EOS takes a deep dive into our oceans, examining threats from overfishing, pollution and global heating.
Dark matters in finance: why climate change is bending bank disclosure standards
Climate change is pushing the boundaries of financial risk disclosure into unknown territory.
Credit Pulse: market update – 16 July 2021
In our latest Credit Pulse, we look at bankruptcies and recovery rates, and present a case study on an energy fallen angel.