Corporate Ratings Outlook Worst Since Crisis

There were three times as many debt-issuing companies on negative credit watch as on positive at the end of 2015, S&P says.
Katie Kuehner-HebertJanuary 13, 2016

Standard & Poor’s negative outlooks on global companies now exceed positive ones by the worst margin 11%  since the 2008-09 financial crisis.

The ratings agency said Tuesday that 17% of debt-issuing companies were on negative credit watch at the end of 2015, outnumbering the number of companies on positive credit watch by a ratio of three-to-one.

“Meanwhile, global corporate creditworthiness has declined slightly since the onset of the crisis,” S&P credit analyst Terry Chan said in the report. “The average long-term corporate credit rating has fallen by about half a notch to between ‘BB-plus’ and ‘BB’ compared with ‘BB-plus’ at end-2008.”

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“The fall in the average rating is because more new corporate ratings were in lower rating categories and due to issuer rating downgrades,” Chan added.

S&P also said its outlook varied by region depending on the credit cycle and exposure to commodities.

“We are expecting mixed fortunes for European corporates, cautious about the U.S., somewhat negative on Asia-Pacific, and see further weakening for Latin America,” the agency said.

The corporate-debt outlook has darkened, particularly in Latin America, because of slower growth in China and sharply lower commodity prices, Bloomberg said. Company defaults have already risen to the highest since 2009 and investors are demanding the biggest yield in four years to hold junk bonds.

Meanwhile, Moody’s Investors Service on Wednesday said the global speculative-grade default rate rose to 3.4% at the end of 2015 with a total of 108 defaults, roughly double the 55 defaults in 2014.

Oil and gas companies contributed to more than 30% of the defaults in the fourth quarter of 2015, with several large companies including Chesapeake Energy, California Resources, and Offshore Group Investment defaulting on their debt obligations.

Moody’s forecast that the high-yield default rate will rise to 3.9% by the end of 2016. For the U.S., it expects the rate will increase to 4.4% and stay near 3.0% in Europe.

Moody’s also notes that in the leveraged loan market, six loan defaults were recorded in the fourth quarter, with all but one from the U.S. The U.S. leveraged loan default rate ended the fourth quarter at 2.0%, up from 1.6% in the previous quarter.