CreditSights: Ratings Continue To Lag The Markets
Driving home how lagged the rating cycle is as a measure of credit quality, the month of April, which saw the corporate bond market post its worst absolute returns of the year also saw continued improvement on the ratings front, according to Moody's Investors Service. In April the number of overall upgrades finally outpaced the number of downgrades, something that last occurred in April 2000 and prior to that, in August 1998. There were 26 downgrades, compared to 25 in March and 28 upgrades, slightly more than last month's level of 26. Activity was centered in the industrials names (16 downgrades and 22 upgrades) with utilities seeing seven downgrades and five upgrades. The finance sector saw little activity: three downgrades and just one upgrade. The speculative grade arena dominated activity, accounting for 17 of the upgrades and 18 of the downgrades. There were nine upgrades and 10 downgrades of investment grade companies.
Leaving aside the month-to-month volatility, the credit cycle has clearly been maturing. In 2003 downgrades outpaced upgrades by an average of 22 a month. So far this year the monthly averages favor downgrades, but only at the pace of six a month. The challenge so far has been for the number of upgrades to gain traction but April's activity is likely to continue into the trend that will define the last stage of the credit cycle. Moody's notes that for the four years between 1994 and 1998, the number of upgrades outpaced the number of downgrades by an average of three a month.
The idea that April's trends will not fade is obviously rooted in the stronger operating statistics that are being reported by companies across the board and it is also seen in the review process at the agencies. There were 23 new upgrade reviews for U.S. issuers during April compared to 18 new downgrade reviews, which sets the stage for further months of upgrades outpacing downgrades. In fact, the total number of companies on review for an upgrade now slightly outnumber the companies on review for a downgrade, a relatively recent development. An even stronger trend is evident in the more forward-looking outlooks. Favorable outlook changes currently make up 77% of all Moody's outlook changes. During April, investment-grade companies saw six favorable outlook changes compared to just four unfavorable changes, but the real activity was recorded in the speculative-grade sector. Speculative-grade companies recorded 14 favorable outlook revisions, well exceeding the two unfavorable revisions.
Moody's also reported that the global issuer-weighted speculative grade default rate continued to drop in April but this month by a more marginal amount. April's reading of 4.0% was a drop of 0.2% on the month and was the sixth monthly decline in the measure. Moody's is forecasting that the rate will fall to 2.8% at the end of the year. The forecast for April 2005 is 2.6%, a sharp contrast with the 6.7% reading that was recorded in April 2003, which underscores just how substantial the recent improvement in credit quality has been. Three U.S corporate bond issuers defaulted in the last month, affecting $328 million of debt.
"The idea that April's trends will not fade is obviously rooted in the stronger operating statistics that are being reported by companies across the board. . ."
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
