CreditSights: Has The Credit Upswing Peaked?
The latest monthly ratings data had a few highlights that add further evidence to the tale of improving credit quality, but the data struggles to find real traction. On the bright side, Moody's Investors Service reported that there were no rated corporate defaults during the month, which is something that hasn't happened in six years. The 12-month speculative-grade global default rate fell to 4.3%, from 5.1% in January. This is the lowest level attained since April 1999. Moody's now predicts that the default rate will fall to 3.00% by the end of the year.
With no wish to naysay such an impressive performance, it is necessary however, to emphasize how difficult it will be to repeat. Already in March, Moody's has noted two defaults, highlighting how rare it is to see a "no default" month. The overall trend should remain positive but such outsized gains are unlikely to be repeated consistently; a recovery undoubtedly, but one that experiences relapses nonetheless. A similar dynamic is developing with regard to the number of upgrades and downgrades. Although reviewing U.S. rating actions over the past several months highlights an underlying trend improvement, the numbers do not show gains month in, month out. In January, Moody's recorded 25 downgrades--considerably worse than the previous month--though we should note that January saw the least number of net downgrades in some time. February was also notable in that the volume of downgraded debt was significant, boosted by the substantial amount outstanding at Delta Air Lines. During the month almost $46 billion of debt was downgraded, versus just $10 billion in January. As a result the total volume of downgrades for the first quarter of the year is set to exceed the $61.6 billion total seen in the fourth quarter of last year.
Another "negative" takeaway from the month's actions was the year's first fallen angels. Amerada Hess, ArvinMeritor and LaBranche & Co. were all tipped out of the investment-grade universe, affecting $5.8 billion worth of debt. There was only a single rising star during the month, with just $450 million worth of debt. Activity remains heavily concentrated in the industrial sector. It is interesting to note that there were no financial sector upgrades during the month, something that has not happened since September 2002. But, the utility sector, which often receives no upgrades, this month accounted for three. Looking at the actions by credit quality, the high yield sector accounted for 21 of the 35 downgrades and 16 of the 18 upgrades.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
