Fallen Angels Decline, Junk Bonds Surge

Fewer companies are losing investment-grade status; more are having an easier time in the high-yield market. Also: time to split Grasso's former job?; ''time to take care of top performers, part two''; and more.

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Standard & Poor’s reported that the number of companies being demoted from investment-grade to junk status — so-called fallen angels — is declining.

In a new study, the credit-rating agency concluded that “the trough in this credit cycle has already occurred.” S&P noted that 44 “fallen angel” issuers have been demoted from investment grade (BBB-minus and above) to speculative (BB-plus and below) in the year to date, compared with 55 in the corresponding period a year ago.

This is especially encouraging, noted S&P, considering that the number of fallen angels had increased each year since 1996, peaking in 2002 amid widespread credit deterioration combined with anxiety about corporate scandals and accounting impropriety.

What’s more, the number of entities worldwide that are potential fallen angels now stands at 48, compared with a revised count of 49 in August. The entities in question are currently rated BBB-minus and either have negative outlooks or are on CreditWatch with negative implications, noted S&P; 31 are U.S.-based.

“Looking ahead, the global fallen angel count for all of 2003 will almost certainly be lower than the peak of 84 established in 2002, although there will remain significant variations by region,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research group.

The 44 fallen angels recorded so far this year affect rated debt worth $64.5 billion. In the same period a year ago, 55 fallen angels worth $141.1 billion were recorded. The United States accounted for 25 of the 44 actions in 2003, which represents the highest count by a region, even though its share of total fallen-angel downgrades has dropped steadily since 2000.

The capital goods and media and entertainment sectors have generated the greatest number of “fallen angels” year to date, with six issuers each worldwide.

Junk Surges Again

Another sign that the credit environment is improving is the ease with which low-rated U.S. companies are bringing out new issues. After a three-week lull, this year is shaping up to be the most active for junk bond sales since 1998.

So far this year, companies have issued more than $94 billion in the U.S. high-yield market, according to Thomson Financial and Reuters. As a result, 2003 is shaping up to becomes the third-busiest year ever, behind the $117 billion total in 1997 and the record $138 billion in 1998.

There are two major reasons for this development. Interest rates have retreated somewhat after rising over the summer, and investors willing to take on more risk in exchange for higher yields are snapping up these issues. Indeed, junk bond have a year-to-date total return of about 20 percent — the best performance since 1991, according to Merrill Lynch & Co.

Almost three-quarters of this year’s junk bond issuance has come from companies refinancing debt, according to Reuters, citing Bear Stearns data. However, refinancings could slow down because many high-coupon bonds have been retired, the wire service pointed out.

However, if overall U.S. economic growth becomes more apparent, there could be another spurt in new issues. “If companies feel more comfortable about where we are in the economic cycle, you are going to see companies start to spend, either for acquisitions or capital expenditures,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors, according to Reuters. “That will be the next major leg of financing in the high-yield market.” (For more, see “New Fall Season for M&A: Fueled by Junk?“)

Time to Split Grasso’s Former Job?

First, old business. Now that Richard Grasso has resigned as chairman of the New York Stock Exchange, will he be required to forfeit a big portion of that controversial $140 million compensation package?

No. In fact, according to USA Today, Grasso is likely to receive at least an additional $8.4 million in severance pay. Under an employment contract that was to run through May 2007, he is entitled to $2.4 million annually in pay and guaranteed bonuses, the paper explained, citing compensation experts.

“He didn’t break any laws,” said Tom Wamberg, CEO of compensation specialist Clark Consulting, according to the paper. “He’s not going out on a cloud of mystery, so he’s probably entitled to what he was owed under his employment contract.”

Now, new business. Who will replace Grasso?

Bloomberg reports that his position was turned down by at least five potential candidates within 24 hours of Grasso’s departure.

The NYSE board asked directors Larry Sonsini — a Silicon Valley lawyer — and Herbert Allison — chief executive officer of TIAA-CREF and once the CFO of Merrill Lynch — to be the exchange’s temporary CEO. Both declined, according to the wire service, citing people familiar with the situation.

On Thursday, former Treasury Secretary Robert Rubin, former PaineWebber CEO Donald Marron, and PCAOB Chairman William McDonough said in interviews with Bloomberg or through spokespeople they wouldn’t be interested in heading up the NYSE. On Friday, reported The New York Times, former Nasdaq Chairman Frank Zarb also declined.

“It’s absolutely stunning that [the exchange] would be so ill- prepared,” Jeffrey Sonnenfeld, associate dean at Yale School of Management, told Bloomberg.

On Sunday the NYSE board announced that John S. Reed, a former chairman and co-chief executive of Cititgroup, would serve as the interim chairman and chief executive of the exchange. SEC chairman William Donaldson, in a statement reported by The New York Times, said that Reed “is independent, experienced and has impeccable credentials, all of which will be crucial as he works with the NYSE board to ensure the highest standards of governance.”

The Times added that Reed, who expects to serve for four to six months until a permanent chairman is named, accepted the interim position on the condition that his pay would be $1 a year.

Time to Take Care of Top Performers, Part Two

As the economy continues to improve and the job market opens up, will you see a mass exodus from your company?

According to a recent survey by The Conference Board, fewer than half of all Americans say they are satisfied with their jobs. This is the highest level of discontent since the survey was first conducted in 1995, according to the board. (And it echoes the findings of a recent Accenture survey of middle managers; read Time to Take Care of Top Performers.”)

“The level of job satisfaction has been steadily on the decline since reaching nearly 59 percent in 1995,” said Lynn Franco, director of the board’s Consumer Research Center. “As technology transforms the workplace — accelerating the pace of activities, increasing expectations and productivity demands, and blurring the lines of work and play — workers are steadily growing more unhappy with their jobs.”

The survey is based on a representative sample of 5,000 U.S. households, conducted in July 2003 for The Conference Board by NFO WorldGroup.

The decline in job satisfaction runs across the board, among all ages, income brackets, and regions. Why the rising unhappiness? The problem is not simply the act of getting up and going to work. Surprisingly, nearly 58 percent of the participants rated their commute as the most favorable aspect of their job.

Not surprisingly, it mostly comes down to money. Just one worker in five is satisfied with his or her company’s promotions and bonus plans, and only about one in three is content with wages.

And as you might expect, the more money that individuals makes, the more satisfied they claim to be. But even among the higher earners in the survey, the overall level of satisfaction has fallen. Just 53.4 percent of this year’s respondents who earn more than $50,000 claimed to be satisfied with their jobs, compared with 66.5 percent in 1995.

Only 46 percent of survey respondents aged 45 to 54 said they are satisfied with their employment. However, the largest decline in overall job satisfaction — from 60.9 percent in 1995 to 47.2 percent today — occurred among respondents aged 35 to 44. This age group, once the most satisfied, is now second to last, notes The Conference Board.

CFOs on the Move

  • AK Steel Holding Corp. announced that chairman and CEO Richard M. Wardrop Jr. and president John G. Hritz have resigned, effective immediately, and that James L. Wainscott has been named acting CEO. Wainscott, who joined AK Steel in 1995 as vice president and treasurer, has been serving as senior vice president and CFO.
  • Lowe’s Cos. Inc. recently appointed Stephen F. Page, vice chairman and CFO of United Technologies Corp., to its board of directors.

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