(Bloomberg) -- In less than two weeks, the amount of distressed debt in the U.S. alone has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries.
In all, U.S. corporate bonds that yield at least 10 percentage points above Treasuries, as well as loans that trade for less than 80 cents on the dollar, have swelled to $533 billion, data compiled by Bloomberg show. On March 6, the total was $214 billion. If you count all company debt globally, including loans to small- and mid-sized companies that rarely if ever trade, the distressed pile could top $1 trillion, estimates from UBS Group show.
“We could see this be worse than 2008,” said Philip Brendel, a senior distressed credit analyst at Bloomberg Intelligence.
Distressed debt is a term used to describe the borrowings of companies that are perceived to be under acute financial pressure and often suggests that there’s considerable risk those borrowers will default on their obligations.
As a global recession looms, there’s a good chance that more and more corporations could end up in similarly dire straits.
Currently, much of it comes from U.S. energy companies that have been pummeled by the all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, is suddenly faced with the prospect of deep losses after oil plunged as low as $20 a barrel. Last month, it traded above $50.
The amount of the oil and gas sector’s distressed debt now stands at over $128 billion. One of the biggest casualties has been Occidental Petroleum Corp., which has seen its funding costs skyrocket and its credit rating cut to junk. Its bonds due in 2024 now yield 18.6% and trade at just 54 cents on the dollar. In early March, they sold for above par.
Of course, energy is hardly the only industry that is suffering. The amount of distressed debt in the retail, entertainment and lodging industries, among others, has also surged as economic activity comes to the virtual standstill because of the coronavirus.
“The speed of change is definitely unprecedented,” said Matthew Mish, a strategist at UBS. “It’s obviously consistent with the change in investor perception around mobility and essentially the fact that the economy, particularly in the U.S., but globally has ground to a halt.”
(Updates with analyst comment in last paragraph)
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