Capital Markets

Ups & Downs at S&P: a Stark Edge to the Downs

Indicators show record lows in potential upgrades, with record highs in downgrade-ready entities.
Stephen TaubJune 10, 2008

Looking for more indicators of credit-market deterioration? From Standard & Poor’s comes two reports. One shows that 292 issuers have potential to be upgraded, the lowest tally since September 2004. The other indicator, not surprisingly, shows the number of entities at risk of downgrades climbing to record levels. They number 738, in fact.

The low count of upgrade-ready issuers in May was a decline of 14 from April, and 103 fewer than 12 months ago. In addition, the number of potential upgrades was 70 fewer than the trailing-12-month average.

S&P asserted that the credit deterioration in the U.S. today, compared with 12 months ago, was the primary reason for the drop in issuers poised for upgrades. It also noted that to a much smaller extent Europe has echoed the trend in the U.S. Latin America, Eastern Europe/Middle East/Africa, and Canada, on the other hand, have been relatively stable.

“There has been a continuous decline in the total count of potential bond upgrades since July 2007, the beginning of disruptions in the credit markets,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “We expect that the deceleration in potential bond upgrades this month will likely diminish further as factors that support upward momentum weaken.”

The 738 May tally of companies at risk of downgrades was 25 more than in April, and 118 more than what it was in the same period a year ago, according to Standard & Poor’s. S&P noted that the upsurge in the downgrade-threatened entities began in mid-summer 2007 with the onset of a material erosion of the residential real estate sector and large write downs by financial institutions.

By sector, mortgage institutions recorded the highest ratio of issuers with a negative bias relative to their total rated universe, followed by forest products and building materials.

“This is unsurprising given the deterioration in the housing markets,” noted Vazza. “Further, consumer discretionary sectors including media and entertainment and consumer products sectors are poised for deterioration due to substantive shrinkage in credit availability and rising energy prices.”