S&P: Credit Conditions Brighter in 2010
Distress ratio and issuer downgrades have fallen
January 25, 2010
Credit conditions appear favorable at the start of 2010 after more than two years of market dislocation that has spurred corporate defaults and downgrades, according to Standard & Poor's.
Also, the credit rating agency said yield premiums or the spread of speculative-grade corporate debt hit a lower point than at any time 2009, closing at 586 basis points on Jan. 15.
Standard & Poor's said its distress ratio, defined as the number of distressed securities divided by the total number of speculative-grade-rated issues, fell to 10.4% as of Jan. 15, down from 14.6% in December and solidly below a long-term average.
Homebuilders and real estate companies led its debt-based distress ratio with a reading of 75%, and insurance had a reading of 28%.
Distress in leveraged loans has also decreased, with the distress ratio falling to 18.9% in December from 21% in November. Among distressed bonds, the number of companies with issues trading at spreads of 1,000 basis points and higher is 99, down from 123 in December, S&P said.
In January, 75% of distressed issues fell into the lowest rating categories, indicating negligible to modest recovery in the event of default, S&P said. In addition, 75% of distressed issues are either unsecured or subordinated notes.
S&P said 63.6% of the 98 rated companies on this month’s distressed list had either negative outlooks or ratings on CreditWatch with negative implications. The outlooks on 26.3% of the companies were stable, 5.1% were positive, and 4% were developing, while 67.7% were rated B- or lower.
In addition, the number of global debt issuers poised for downgrades continued its decline in January to 804 issuers from 824 in December -- a low not seen in 15 months, S&P said. That 804 level is 134 fewer than the average of the trailing 12 months and down 132 from a year ago.
S&P said forest products and building materials, sovereigns, and media and entertainment appear to be under stress. These sectors had the largest changes in negative bias.
By region, the U.S. continues to top the list of potential bond downgrades, with approximately 51% of ratings showing downside risk, followed by Europe with 25%, S&P says.
By rating, B-rated companies have the highest potential for downgrades, according to S&P, with 98 companies, or 12%, in the category. Globally, of the 804 issuers at risk of a downgrade, 47% are rated BB+, a speculative grade.
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