Capital Markets

Nearly a Quarter of Bonds Face Downgrade

S&P study shows the percentage of U.S. issues that is in danger of being downgraded climbing to its highest level since 2003.
Roy Harris and Stephen TaubSeptember 3, 2008

Nearly a quarter of the entities that currently have rated debt are in danger of having that debt downgraded, according to the latest calculations by ratings service Standard & Poor’s.

S&P’s latest Global Fixed Income Research report, titled Downgrade Potential Across Credit Grades And Sectors, shows that 747 debt issues were facing possible downgrade in August — 18 percent higher than the total count a year ago — and double the count of issues poised for potential upgrades.

“This continues the trend that started last July, where a materialized housing slowdown coupled with large bank write-downs largely assisted in dislocating the credit markets,” S&P notes in the report. It defines potential downgrades as entities having either a negative outlook or ratings on CreditWatch with negative implications across rating categories ‘AAA’ to ‘B-‘.

That big a slice of total U.S. issues hasn’t been in danger of downgrade since December 2003, when percentage stood at 26. The all-time high for such downgrade-ready debt issues was December 2002, when 32 percent were in that category, according to S&P’s Diane Vazza, managing director for Global Fixed Income Research.

This June, the number of issues facing downgrade had actually declined slightly, and stood at 22 percent. But the upward trend resumed. Not surprisingly, the U.S. continues to top the list of potential bond downgrades globally.

Broken down by sector, forest products and building materials recorded the highest ratio of issuers with a negative bias relative to their total rated universe, followed by mortgage institutions and automotive. By rating designation, ‘B’ rated companies have the highest potential for downgrades, with 156 companies, or 21 percent of the total.

Globally, of the 747 issuers at risk for downgrades, 62 percent are speculative-grade, rated ‘BB+’ or below.