S&P Sees Sweet Spot in Credit Quality

For the first time in six years, the "rising stars" beat out the "fallen angels."
Stephen TaubSeptember 22, 2004

While the economy may be showing signs of slowing down, credit quality seems to be strengthening.

For the first time since 1998, the number of “rising stars” (companies moving from below-investment-grade status to investment-grade status) exceeded the number of “fallen angels” (investment grade credits moving to speculative grade), according to Standard & Poor’s.

As of Sept. 15, there was a total of 31 rising stars globally. That’s more than double the total recorded for all of 2003 and nearly triple the number recorded in the same period a year ago.

At the same time, the number of fallen angels was 20, a steep drop from the 45 recorded in the corresponding period in 2003, according to S&P.

What’s more, 28 rated entities showed the greatest potential to acquire rising-star status, according to the report. Potential rising stars are defined as entities that are currently rated BB-plus with either a positive outlook or with ratings on CreditWatch with positive implications.

Of the 28 potential rising stars, 26 had a positive outlook and the remaining two had ratings that were on CreditWatch with positive implications, S&P noted.

S&P explained that a steady decrease in global default rates and strengthening economic fundamentals have helped bolster investors’ taste for risk. Further, while the bond market has more of a potential downside now than it did during the last two or three years, the uneven pace of economic recovery globally leaves room for extended gains, according to the ratings agency.

Internationally, the sectors with the highest potential for rising-star status are banks, retail companies and restaurants, oil and gas exploration and production, and high technology.

The 31 rising stars recorded in 2004 thus far affected rated debt worth $41 billion. Of that, the debt of France’s Vivendi Universal S.A. alone accounted for about $20 billion.

The United States accounted for 21 of the 31 global total rising stars in 2004, mostly because it has many more companies in general, according to S&P.