Capital Markets

Credit Quality Continues to Improve

The banking, high technology, and oil and gas sectors are especially well placed for upgrades, according to Standard & Poor's.
Stephen TaubJune 30, 2006

The number of entities poised to benefit from potential upgrades reached 366 in June, 8 more than the previous month, according to a new report from Standard & Poor’s.

“The surge in potential bond upgrades for the second consecutive month attests to the continued strength and benevolence in momentum at this late stage of the credit cycle,” stated the report.

S&P singled out banks, high technology, and oil and gas exploration and production as sectors that are especially well placed for upgrades. Since last month’s report, oil and gas, chemicals, packaging, and environmental services have shown the largest gains in the number of companies that could be upgraded.

Issuers rated B+ had the highest potential for upgrades, accounting for 17 percent of the total.

Despite these apparent positive trends, the ratings agency warned that the roster of issuers that may benefit from an upgrade will diminish as supporting factors weaken from peak levels. Credit spreads, which have already expanded from recent lows, will maintain their slow upward creep in the next 12 months as markets reprice risk, according to S&P. The agency also noted that a rising appetite for debt-financed mergers and acquisitions could constrain credit-quality improvement.

Further, S&P pointed out that after practicing balance-sheet conservatism during the past several years, companies appear “ready to break from the parsimony that characterized corporate behavior during the recent cycle.” On the other hand, corporate profitability is expected to decline as input costs increase and earnings decelerate, S&P noted.