| This just in from Fitch Ratings, and it suggests trouble ahead for companies that haven’t done much to improve their balance sheets:
A recent survey conducted by Fitch revealed that issuers with
bonds rated in the 'CCC' through 'C' categories, those most prone to
default, may be falling behind better rated companies in registering
improvements in key credit metrics. This is especially noteworthy
considering that the large size of the 'CCC' through 'C' pool remained
unchanged at the end of June, finishing the quarter at $110 billion. Fitch
examined the aggregate financial performance of 50 companies rated 'CCC' or
lower. Outstanding bonds issued by this pool of companies represented
approximately 50% of the par value of all 'CCC' through 'C' bonds
outstanding as of the end of June (as noted above, $110 billion in total).
In the first quarter of 2005, 58% of the companies in this sample reported
higher debt levels year over year while only 46% reported higher EBITDA.
This is in contrast to trends observed for 'B' and 'BB' issuers where the
number of companies reporting increases in EBITDA (66% and 74%,
respectively) exceeded the number of companies reporting increases in debt
(46% and 31%, respectively).
Ultimately, credit availability is a short-term fix. For these 'CCC'
through 'C' rated companies to avoid default, they will need to accumulate
significant operating gains. The relative lag in performance and lack of
meaningful upgrades for this group of highly levered companies suggests
that any macroeconomic or funding disruptions could quickly push the
default rate up.
While Fitch does not anticipate that the default rate will rise above its
long-term average of 5.5%, Fitch believes the rate has reached a cyclical
low and will head higher over the next 12 months.
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