The portion of U.S. junk bonds trading at distressed levels rose to 16.9 percent in February, up from 11.1 percent in January in a sign that defaults are headed higher, Standard & Poor's said on Wednesday.
The ratio of distressed debt is now at the highest level since June 2003, S&P said.
Bonds are considered distressed when their yields, which move inversely to prices, are at least 10 percentage points higher than those on U.S. Treasuries.
"A rising distress ratio signals an increased need for capital and could act as a precursor to more defaults," S&P said.
The rating agency said it expects junk bond defaults to rise to 4.6 percent by the end of the year.
Junk bond defaults in January were at 1.09 percent, which was near a 25-year low.
As of Feb. 15, about $104 billion of bond issues were distressed, nearly $40 billion more than in January, S&P said.
The amount of distressed debt has surged as banks and bond investors pulled back from lending to riskier companies amid recession fears and credit market turmoil. The percentage of distressed debt is up from an all-time low of 0.8 percent last June.
"The continued tightening of credit conditions, which began in mid-summer of 2007, has accelerated in earnest," S&P said in a report. Though the Federal Reserve has made multiple attempts to ease credit conditions, market volatility and a dearth of lending has hit all sectors, the rating agency said.