The creditworthiness of U.S. companies is continuing to decline, according to recent reports by Standard & Poor's. The ratings agency said the high-yield market is closely approaching a ratings mix of 50% investment grade and 50% speculative grade. The non-financial issuer area is already 61% speculative grade.
The U.S. Ratings mix has dropped consistently since the investment grade percentage peaked at 72% in 1992. Since 2000, the investment-grade space has dropped by 13.2% to 1,587 issuers. Speculative-grade issuer ratings climbed by 17.8% to 1,504 issuers, according to S&P. As of Sept. 30, speculative-grade rated issuers stood at a record high of 49%, up from 48% last year and a low of 28% in 1992. This has lowered the overall median issuer rating to BBB- from BBB+ in 1996 and A- in 1992, according to the ratings agency.
In its report, "U.S. Ratings Distribution: A Twenty-Five Year March to Junk," S&P writes that both regions--U.S. and Europe--have seen credit quality slip during the past decade. It attributes this to a low interest rate environment and elevated investor risk tolerance, as well as extremely liquid markets. This has allowed companies to lengthen the maturity of their debt and lock in low interest rates.
The ratings agency says that the high level of risk tolerance along with strong demand for spread has caused more speculative-grade issuers to enter the bond market. It says that although the number of acquisitions and buyouts have reduced the number of investment-grade companies, the shareholder support for these actions may suggest that companies are accepting a lower credit quality in order to maintain shareholder value.
Diane Vazza, managing director, said that managers are realizing they might need to take on some leverage for investment purposes or for an acquisition, or may not aspire to a higher rating. "[This] is something that is a phenomenon that is here to stay," she said.
If, however, the market does begin to turn and there are more defaults and lending becomes more restrictive, some of these companies that have looked to go further down the credit spectrum may have trouble finding lenders. "[The default rate] is somewhat artificially low and to the extent that there is a more macro-economic GDP slowdown, credit conditions will eventually get tighter and eventually there will be some drainage of liquidity and these companies that had access to refinance themselves won't have that access to liquidity. That is the credit cycle," she said.