Global credit trends on the upswing: S&P
By Our Banking Bureau | 15 Jul 2002
1
Global
credit trends on the upswing: S&P
Our Banking Bureau
15 July 2002
New York: The global credit quality continues its upswing into the second quarter of 2002, says a Standard and Poors (S&P) report. According to the report the global credit ratio ratio of downgrades per upgrade fell to 3.1 in the second quarter from 5.3 in the first quarter and 7.0 in the final quarter of 2001.
A
total of 253 downgrades and 82 upgrades were recorded
in the second quarter compared with 303 downgrades and
57 upgrades a quarter ago and 267 downgrades and 59 downgrades
in the second quarter of 2001.
Improvements were noted in the US, the European Union (EU), and in the emerging markets compared with the first quarter. The credit ratio for the US fell to 3.4 in the latest quarter from 5.4 a quarter earlier; the corresponding ratio for the EU was 3.4 and 20.5, respectively. Within emerging markets, credit quality improvements in the Asia Pacific region more than compensated for the sharp deterioration in Latin America.
But the credit ratio remained flat at 8.0 in Japan and worsened to 4.0 from 2.0 in Canada. With 48 upgrades and 162 downgrades, the US share of total ratings actions rose to 63 per cent in the second quarter from 59 per cent in the first.
Even though the global tally of downgrades should continue to decline in the second half of the year, additional downward pressure on credit quality could materialise if further accounting irregularities surface or earnings restatements emerge, the report adds.
A total of 133 defaults were recorded globally at the end of the second quarter on rated debt obligations worth $85 billion. At the end of the first quarter, there were 80 defaults on $37.8 billion of rated debt. Of the publicly rated defaults in the second quarter, the US (and Bermuda) accounted for the lion's share, with 67 issuers defaulting on $68.5 billion. The EU came in second, with 10 defaults on rated debt worth $6.4 billion, followed by Canada, which recorded four defaults on rated debt of $5.1 billion.
At the end of June 2002, the rolling 12-month global speculative-grade default rate was 11.17 per cent, up from 10.61 per cent recorded a quarter earlier. In this period, the US speculative-grade default rate actually declined to 9.62 per cent from 9.80 per cent. The global tally of 48 weakest-rated issuers as of 9 July 2002 denoting issuers that have credit rating designations of triple-'C' or lower and have been placed either on CreditWatch with negative implications or have a negative outlook is lower than the peak of 59 issuers identified in January, indicating that global default rates are likely to decelerate modestly in the remainder of 2002.
Volatility in US industrial credit spreads has turned up once again after having abated in the first quarter. Speculative-grade credit spreads ended the second quarter at 710 basis points, higher than the 600 basis points at the end of the first quarter but still below their October 2001 peak.
Meanwhile, investment grade credit spreads recorded at 170 basis points on 28 June 2002 still remain wider than their levels at the end of the first quarter. Even though the Federal Reserve is expected to keep benchmark interest rates on hold in the US until early next year, spreads-both speculative-grade and investment-grade will remain vulnerable to recurring headline risk, states S&P.
New issue volume in the US will fail to match last year's stellar levels. In the first half of this year, issuance volumes fell 18.4 per cent year-over- year to US$404.9 billion. The surge in refinancing of bank debt and commercial paper is coming to an end and even though some opportunistic issuance cannot be ruled out as long as interest rates remain relatively low, future gains in issuance volume will depend on a revitalisation of capital spending by businesses.
Issuance levels in the EU are also substantially lower having declined 13.7 per cent in January-June over a year ago to US$338.3 billion than the record levels seen a year earlier, notwithstanding continued low interest rates.
According to S&P, the subdued merger-and-acquisition activity combined with a poor earnings and profitability outlook have curbed appetite for new issues. During the second quarter, the decline in volumes spread beyond the ailing telecommunications sector and affected a broader range of sectors.
The outlook for new issues in Japan is less gloomy since the start of the new fiscal year (beginning April) even though issuance volumes of $55.4 billion in the first half of the year still trail last years levels by 1.5 per cent. Bank loans continue to shrink but cash rich investors have shown increased proclivity to re-enter the bond market in search of higher yields.
The convertible debt market also shows strong gains based on expectations of a stock market rebound after years of stagnation. If the rising tide in business sentiment as reflected in the most recent Tankan survey maintains momentum, issuance volumes could outpace last years levels.
Emerging-market corporate bond issuance picked up in the second quarter, owing to gains in the Asia-Pacific region, notably South Korea. Issuance volume of US$68.6 billion was recorded in the first half, an increase of 6.9 per cent over the corresponding period a year ago. The outlook is mixed for the remainder of the year.
Our Banking Bureau
15 July 2002
New York: The global credit quality continues its upswing into the second quarter of 2002, says a Standard and Poors (S&P) report. According to the report the global credit ratio ratio of downgrades per upgrade fell to 3.1 in the second quarter from 5.3 in the first quarter and 7.0 in the final quarter of 2001.
Improvements were noted in the US, the European Union (EU), and in the emerging markets compared with the first quarter. The credit ratio for the US fell to 3.4 in the latest quarter from 5.4 a quarter earlier; the corresponding ratio for the EU was 3.4 and 20.5, respectively. Within emerging markets, credit quality improvements in the Asia Pacific region more than compensated for the sharp deterioration in Latin America.
But the credit ratio remained flat at 8.0 in Japan and worsened to 4.0 from 2.0 in Canada. With 48 upgrades and 162 downgrades, the US share of total ratings actions rose to 63 per cent in the second quarter from 59 per cent in the first.
Even though the global tally of downgrades should continue to decline in the second half of the year, additional downward pressure on credit quality could materialise if further accounting irregularities surface or earnings restatements emerge, the report adds.
A total of 133 defaults were recorded globally at the end of the second quarter on rated debt obligations worth $85 billion. At the end of the first quarter, there were 80 defaults on $37.8 billion of rated debt. Of the publicly rated defaults in the second quarter, the US (and Bermuda) accounted for the lion's share, with 67 issuers defaulting on $68.5 billion. The EU came in second, with 10 defaults on rated debt worth $6.4 billion, followed by Canada, which recorded four defaults on rated debt of $5.1 billion.
At the end of June 2002, the rolling 12-month global speculative-grade default rate was 11.17 per cent, up from 10.61 per cent recorded a quarter earlier. In this period, the US speculative-grade default rate actually declined to 9.62 per cent from 9.80 per cent. The global tally of 48 weakest-rated issuers as of 9 July 2002 denoting issuers that have credit rating designations of triple-'C' or lower and have been placed either on CreditWatch with negative implications or have a negative outlook is lower than the peak of 59 issuers identified in January, indicating that global default rates are likely to decelerate modestly in the remainder of 2002.
Volatility in US industrial credit spreads has turned up once again after having abated in the first quarter. Speculative-grade credit spreads ended the second quarter at 710 basis points, higher than the 600 basis points at the end of the first quarter but still below their October 2001 peak.
Meanwhile, investment grade credit spreads recorded at 170 basis points on 28 June 2002 still remain wider than their levels at the end of the first quarter. Even though the Federal Reserve is expected to keep benchmark interest rates on hold in the US until early next year, spreads-both speculative-grade and investment-grade will remain vulnerable to recurring headline risk, states S&P.
New issue volume in the US will fail to match last year's stellar levels. In the first half of this year, issuance volumes fell 18.4 per cent year-over- year to US$404.9 billion. The surge in refinancing of bank debt and commercial paper is coming to an end and even though some opportunistic issuance cannot be ruled out as long as interest rates remain relatively low, future gains in issuance volume will depend on a revitalisation of capital spending by businesses.
Issuance levels in the EU are also substantially lower having declined 13.7 per cent in January-June over a year ago to US$338.3 billion than the record levels seen a year earlier, notwithstanding continued low interest rates.
According to S&P, the subdued merger-and-acquisition activity combined with a poor earnings and profitability outlook have curbed appetite for new issues. During the second quarter, the decline in volumes spread beyond the ailing telecommunications sector and affected a broader range of sectors.
The outlook for new issues in Japan is less gloomy since the start of the new fiscal year (beginning April) even though issuance volumes of $55.4 billion in the first half of the year still trail last years levels by 1.5 per cent. Bank loans continue to shrink but cash rich investors have shown increased proclivity to re-enter the bond market in search of higher yields.
The convertible debt market also shows strong gains based on expectations of a stock market rebound after years of stagnation. If the rising tide in business sentiment as reflected in the most recent Tankan survey maintains momentum, issuance volumes could outpace last years levels.
Emerging-market corporate bond issuance picked up in the second quarter, owing to gains in the Asia-Pacific region, notably South Korea. Issuance volume of US$68.6 billion was recorded in the first half, an increase of 6.9 per cent over the corresponding period a year ago. The outlook is mixed for the remainder of the year.
Relatively tight spreads and rising optimism about economic fundamentals should boost issuance from Asia but will be counterbalanced by downbeat prospects from Latin America. The cost of borrowing in emerging markets will also remain vulnerable to a potential blowout of spreads either in the US or Europe.
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