Debt distress level at highest since recession

Higher interest rates are about to hit companies - just when many are ill prepared to handle them.

The Federal Reserve this month took interest rates up for the first time in nearly a decade - ending the days of free money. It might take a few years for higher rates to hit companies - as they look to refinance debt. But the troubling part is many companies aren't in great shape to eat the higher costs.

The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor's. The biggest culprit for the jump in these so-called "weakest links" is the oil and gas sector, which accounts for 34 of them. But financial companies are close behind, representing 33 of the weakest links, says S&P.

The bond markets are starting to factor in the dangerous combination of rising interest rates as well as profit weakness in several sectors. The U.S. distress ratio - a measure of the amount of risk the market has priced into bonds - hit 20.1% in November, which is the highest level since hitting 23.5% in September 2009, says S&P. That's an onerous indicator since September 2009 takes investors back to the last recession.

The largest percentage of the distressed debt - 37% - is concentrated in the oil and gas sector. The sector is getting hammered by falling commodity prices. But metals, mining and steel is hurting too, with a 72% distress ratio. Time will tell if the debt market can handle this shock.