Global credit quality has seen moderation in the current year, with a steady deceleration in the share of downgrades to total rating actions each quarter, a report released from Standard & Poor’s Ratings Services says. The improvement, however, was generated by a decline in downgrades rather than an increase in upgrades. Indeed, the number of rising stars recorded in 2003 continued to outstrip the number of fallen angels, a trend in place since 1999. The gap between them has narrowed this year, largely attributable to a drop in fallen angel activity.
“Barring a blip in 2002, the number of rising stars recorded globally has been broadly declining every year since its peak in 1997,” Diane Vazza, head of Standard & Poor’s Global Fixed Income Research group, claims. “Year-to-date (ending December 9), 22 rising stars have been recorded, compared to 30 for all of 2002. Looking ahead, the incidence of rising stars should start to inch upward gradually, though gains are likely to be more visible in 2004 once the recovery is well under way.”
As of December 9, 24 rated entities were best placed to acquire rising star status, one more than the 23 reported in our last report on global rising stars published September 19, 2003. The sectors with the highest potential for rising stars globally were oil and gas exploration and production, and retail/restaurants.
Expectations for an overall pick-up in upgrades in the coming months have increased-notwithstanding the relative absence of rising stars-given the current stage of the economic and business cycle. A look at the entire range of entities listed with a positive bias across the ‘AA+’ to ‘B-‘ ratings spectrum indicates that 244 entities appear well placed for potential upgrades, 68 fewer than the 312 reported in September. The net decrease since September is magnified, however, by a large increase in the number of entities that no longer have rated debt, particularly in the financial and healthcare sectors. Of the 244 entities listed with either a positive outlook or a CreditWatch with positive implications across all rating designations from ‘AA+’ to ‘B-‘, banks, utilities and healthcare were especially well placed for potential upgrades. Interestingly, this sector concentration varies from the sectors showing the greatest potential for rising star activity. In comparison with the September report on potential bond rating upgrades, telecommunications and automotive sectors displayed the largest-albeit still low in absolute terms-increase in the number of potential upgrades, with an increase of five and three issuers respectively.
Some 22 issuers globally made the leap to investment grade (‘BBB-‘ and above) from speculative grade (‘BB+’ and below) in the year to date, affecting rated debt worth US$20.8bn. Barring a small reversal in 2002, the number of rising stars has been on a steady decline since its recent peak in 1997, which is not surprising in light of the weak credit and macroeconomic environment during the ensuing period. In 2002, a total of 30 rising stars were recorded on debt outstanding worth US$39.5bn, of which 10 were affected by the sovereign upgrade of Mexico. Geographically, the US recorded 15 out of the global total, which is in part attributable to a bigger rated population size. Within the US, the homebuilders/real estate sector recorded four rising stars-the highest count in any sector-followed by utilities, which recorded two. Upgrades among homebuilders were driven by sound financial profiles, conservative operating strategies, successful efforts to diversify beyond core markets, or mergers. Elsewhere, the Asia-Pacific region accounted for the five rising stars, including three in the banking sector and one each in transportation and media and entertainment, and the UK recorded the remaining two.
As of December 9, 24 rated entities globally showed the greatest potential to acquire rising star status, one greater than the number reported in S&P’s September publication. These potential rising stars are currently rated ‘BB+’ with either a positive outlook or a CreditWatch with positive implications.
Of the 24 potential rising stars, 22 were listed with a positive outlook and the remaining two were on CreditWatch with positive implications. Some 19 of 24 entities belonged to the industrial sector, two were in the banking sector, and one each was in insurance and telecommunications. Within the broad-based industrial category, however, oil and gas exploration and production and retail/restaurants showed the most potential for rising stars, with four and three issuers respectively. Other subsectors that also showed promise were automotive, capital goods, healthcare, and telecommunications with two issuers each.
As of December 9, a global total of 244 entities appeared most likely to benefit from potential upgrades across all rating designations from ‘AA+’ to ‘B-‘-these entities were listed either with a CreditWatch with positive implications or with a positive outlook. The current list includes a net decrease of 68 issuers compared with September 5, 2003, when 312 issuers were listed as potential upgrades. Entities that bear either a positive outlook or a CreditWatch listing with positive implications are a good leading indicator of actual upgrades: for example, of the 160 entities that came off the September list, a relatively high percentage-one-third-experienced upgrades.
Since September 5, 2003, 92 additional issuers have been added to the positive lists and 160 no longer appear on the list. One third of those coming off the September list (52 issuers) experienced upgrades, 21 saw a change in their CreditWatch/outlook status, eight are no longer rated, and 79 no longer have any rated long-term debt. Of the 92 new issuers added to the list in December, the majority (62 issuers) was included because of a change in outlook/CreditWatch status without being accompanied by a change in ratings.
The ‘B+’ rating designation showed the most potential, accounting for 14% of the total pool of potential upgrades. By rating category, the preponderance appeared in the ‘BB’ rating category-including the ‘BB+’, ‘BB’, and ‘BB-‘ rating designations-which accounted for 30% of the total pool of potential upgrades. Of the 244 issuers on the list, 46% are investment-grade (‘BBB-‘ and above), and the remaining 54% are speculative-grade (‘BB+’ and below). The concentration in the speculative-grade segment is not surprising, since speculative-grade ratings are generally associated with greater volatility. In comparison with September, most rating designations showed a decline in the number of issuers, although the ‘BBB-‘ rating designation showed the most movement, with 16 fewer issuers listed as potential upgrades. On the flip side, the ‘B’ rating designation increased the most, its pool of potential upgrades expanding by four issuers since September 5.
Globally, the banking, utilities, and healthcare sectors are the most prominently placed within the pool of potential upgrades, accounting for 34% of the total pool. Other sectors that were favorably placed include consumer products, telecommunications, and media and entertainment. Telecoms and automotive sectors displayed the largest – albeit still low in absolute terms – increase in the number of potential upgrades since September, with an increase of five and three issuers respectively. Following a spate of heavy downgrades in the two prior years, the telecommunications sector now appears more evenly balanced in its rating trend, allowing room for cautious optimism in the months ahead. Conversely, the sectors that saw the biggest absolute declines since September were insurance, banks, and healthcare. The declines in the financial sector are partly magnified by withdrawal of rated debt, affecting issuers both at the parent and subsidiary levels.
By geography, the US still accounts for the largest number of entities listed as potential upgrades-141 of 244 entities-but that concentration is in part reflective of the larger rated population size in the US Elsewhere, Europe and the Asia-Pacific region showed the biggest potential for recording upgrades.