CreditSights: The Week In Credit
The pace of primary issuance quickened last week but still remains a little light if the rumors of a heavy supply pipeline this month come to fruition. Through last Thursday, investment-grade volumes were just $5 billion but there was been an uptick in high-yield issuance with $2 billion of new deals launched. Of note is the bias of deals to short maturities. GE Capital priced an offering of $2.5 billion three-year notes which included $1.75 billion of floating rate notes. Wells Fargo Bank also issued $1.5 billion of three-year FRNs during the week. The fact that the supply is embracing such a diversified investor base has meant that the order books have quickly become oversubscribed. The books are reported to be populated with cash orders and therefore there has been no spread overhang in the market to date. In fact, the increased activity is at this point contributing to a constructive tone. The option adjusted spread of the Merrill Lynch US Corporate Master index at 114 basis points was little changed on the week and the Goldman Sachs CDS 150 remains close to its tightest level of the year. CreditSights is forecasting at least $33 billion in investment-grade issuance in September (up from a low of just $11.65 billion in August) and a further $100 billion in the fourth quarter to reach our 2003 investment-grade forecast of $430 billion.
Turning from supply trends to ratings trends, corporations are making continued progress on improving their credit quality according to the latest ratings data. Moody's Investors Service reported that in August there were just 30 downgrades across the credit spectrum, slightly down from July's tally of 33. The actions affected less than $20 billion of debt and the results augur well for a sharp improvement in third quarter ratings totals relative to the first two quarters of the year and the experience of 2002. The average monthly pace of downgrades last year was 54, but this has now fallen to 38 for the eight months ending this August. There is no doubt that we are well past the nadir of the credit cycle but the fact that we are in the early stages of the upswing is given credence by the upgrade statistics. As yet there has been no sustained increase in the number of monthly upgrades awarded. Moody's announced just eight upgrades in August compared to 12 the previous month. And the monthly run rate for upgrades in 2003 year-to-date at 15 is only slightly above 2002's pace.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.