The number of potential fallen angels is creeping higher, in one of the first signs the credit cycle has peaked, according to Standard & Poor's. Meanwhile, both the downgrade ratio and the default rate are moving up. As of June 8, S&P recorded 48 potential fallen angels amounting to $83.8 billion in potentially downgraded debt, three more than was reported in May and six more than a year ago June.
Diane Vazza, head of S&P's global fixed-income research group, expects the number of credits on the cusp of junk to continue. She tipped the media/entertainment, high technology and insurance sectors as the ones most vulnerable to additional downgrades. The 18 fallen angels thus far this year amounted to $485 billion worth of debt, more than 52 times the volume recorded during the same period last year due to General Motors and Ford Motor Co.'s downgrades.
"We're at the peak [of the credit cycle]... we could be in it for a period of time but there are signs there is gradual deterioration," Vazza noted, referring to the buildup in distressed supply and the rising default rate, which ticked up to 1.68% in May. "We're sitting at the top with the downgrade ratio at 61%," which is its long-term average, she noted. The downgrade ratio is the proportion of downgrades to total rating action.
