Capital Markets

Fallen Angels Rising

Last month saw a sharp increase in the number of companies that lost their investment grade ratings.
Stephen TaubAugust 15, 2006

Credit quality is showing signs of cracking a bit.

According to Standard & Poor’s, the number of fallen angels — that is, issuers that were downgraded to speculative grade from investment grade — increased sharply during the last month.

The rating agency noted that there were 32 fallen angels recorded through Aug. 11, on rated debt worth $39 billion. That is an increase of seven from the prior month’s report. Four of the companies — Aramark Corp., Southwestern Energy Co., ALLTEL Georgia Communications Corp., and Alltel Communications Holdings of the Midwest Inc. — were based in the US.

Three of the seven companies saw their credit ratings tank as a result of mergers or acquisitions.

S&P also said that another 42 companies around the world, with rated debt totaling $72.6 billion, are at risk of becoming fallen angels. That’s an increase of two over last month, but five fewer than were at risk the same time a year ago.

According to Diane Vazza, Managing Director and head of Standard & Poor’s Global Fixed Income Research, the number of fallen angles also outweighs (by 11 companies) the number of rising stars — that is, companies that have moved back into the investment grade category. This is a reversal of the pattern seen in all of 2004 and 2005, she added.

The rise in the number of fallen angels is only one indicator of corporate credit quality. The default rate for speculative grade debt — also known as junk debt — has defied expert predictions and has remained at a very low level this year.

However, in July, CFO.com noted that the junk default rate edged up a bit in the second quarter, from the first quarter of this year.