Distressed debt: Ailing credit is still the next big thing

Last month, the credit bulls, if not exactly bellowing, were certainly peeping out of their hiding places following the Federal Reserve’s 50 basis point interest rate cut, the Bank of England’s bail-out of Northern Rock and injections of three-month liquidity, better-than-expected earnings from the big US investment banks after modest write-downs of LBO loan commitments, and signs of easier conditions for issuers seeking to roll over commercial paper.

Spreads rallied in late September to the point where Citi’s credit analysts suggested "further tightening would take us precariously close to where spreads were in May".

Is the great credit scare over, then?

Moody’s analyst John Lonski points out that the non-financial corporate debt to pre-tax profits ratio, which rose to 5.8:1 in the second quarter of this year, looks decidedly healthy compared with 10.9:1 in the recession of 1990 and 8.4-times pre-tax profits at the...