Capital Markets

Credit Quality Improving More Slowly

The companies that seem to be in the best financial shape reside in the Asia-Pacific region, where upgrades continue to be concentrated, but even t...
Stephen TaubApril 18, 2005

Global credit quality improved in the first quarter, but the rate of improvement slowed, according to Moody’s Investors Service

Moody’s pointed out that the global ratio of upgrades to downgrades stood at 1.4 for the first quarter of 2005, down from 1.8 for the prior quarter. Further, at the end of the first quarter, 2.4 percent of issuers were on review for upgrade, down from the 3.6 percent figure three months earlier. This trend suggests that the pace of upgrades will continue to decline, Moody’s added.

The companies that seem to be in the best financial shape reside in the Asia-Pacific region, where the upgrades continue to be concentrated, noted the ratings service. But even that region is starting to feel an economic pinch. In the most recent quarter, about 6.5 percent of the Asia-Pacific issuers were upgraded, compared with about 25 percent in the previous quarter. Moody’s also noted that 4.1 percent of issuers in the region were on review for upgrade at the end of March.

In North America, 2.9 percent of issuers were upgraded last quarter; 2.7 percent were downgraded. Looking ahead, Moody’s pointed out that in both North America and Europe, the number of issuers on review for downgrade exceeds the number on review for upgrade.

“Future rating actions are also likely to be more concentrated among speculative-grade issuers rated Ba or single B,” said vice president and senior analyst Praveen Varma, in a statement.

Declining credit quality is confirmed by sentiments being communicated on Wall Street of late, as many strategists have been counseling clients to flee to less riskier assets. Several firms, including UBS, Lipper, and Pimco have recently recommended that investors lighten up on their allocation to junk bonds.

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