Two forces are clashing in the corporate bond market: new issues of notes and bonds surging at record rates, while commercial paper slowly expands, albeit in fits and starts. Meanwhile, though, existing credit continues to crumble.
Standard & Poor’s reports that the number of global issuers poised for downgrades increased to 977 in February. This is up about 40 percent from February 2008, when 700 issuers were at the risk of a downgrade. The 977 count, further, exceeds by 285 the average figure for the past 42 months.
The credit rating agency says this is the highest level recorded in the 15 years that it has kept score. However, its data does not go back to the 1989-90 period, when the nascent junk bond market blew up after Drexel Burnham Lambert’s Michael Milken was arrested, and the leveraged buyout market collapsed for a time – literally overnight, as a major banking crisis ensued.
And, of course, S&P does not have data going back to the 1930s and the era of the Great Depression.
Still, it is worth noting that the ratio of potential downgrades to potential upgrades increased to more than six-to-one in February, triple the level at the beginning of 2008. “The upward rally of potential downgrades that began in June 2008 seems to have no boundaries,” S&P states in a new report.
Geographically, the U.S. continues to top the list of potential bond downgrades, with roughly one-quarter of current ratings showing downside risk. Not surprising, perhaps, given that the housing and financial sectors continue to show the highest downgrade risk.
In terms of absolute numbers, financials lead with the most downgrade potential, closely followed by media and entertainment, consumer products, and utilities.
Meanwhile, Standard & Poor’s overall ratings show that 29 percent had either a negative outlook, or ratings on CreditWatch negative in February 2009. That percentage is up from 26 percent at the end of 2008, and from 14 a year earlier.
By rating designation, B-rated companies have the highest potential for downgrades, with 150 companies, or 15 percent of the total). Globally, of the 977 issuers at risk for downgrades, 54 percent are rated speculative grade (BB+ or lower).