Distressed ratio falls to lowest level in a year-S&P

NEW YORK Aug 21 (Reuters) - Standard & Poor's speculative-grade distressed ratio fell to its lowest level in a year in August, possibly signaling a period of more favorable lending ahead, the agency said in a report on Friday.

S&P said that its distressed ratio was at 25.3 percent as of Aug. 14, down from 35.9 percent a month earlier.

Speculative-grade, or "junk" bond distressed issuers are those whose debt trades at or above 1,000 basis points over comparable U.S. Treasuries.

The ratio measures the amount of distressed issuers against the rest of the high yield bond market.

"Corporate spreads, though still at historically elevated levels, have been receding in 2009," said Diane Vazza, lead author of the report.

After reaching an all-time high of over 80 percent in the first quarter of this year in the wake of the global economic downturn, the distressed ratio has fallen consistently since.

Speculative-grade corporate bond spreads tightened to 816 basis points over Treasuries as of Aug. 14 from record high of 1754 basis points in December, the agency said.

But while spreads have tightened over the past several months in general, they are expected to remain range-bound for the remainder of the year.

"However, with recent increases in default activity and a backdrop of economic malaise, we expect spreads to remain near current levels," said Vazza.

Among sectors in the high-yield market, issuers in media and entertainment continue to dominate the distressed space, comprising of nearly 26 percent of August's total.

Financial sector companies come in second with over 16 percent of issuers distressed.

(Reporting by Tom Ryan; Editing by Diane Craft)