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Moody's Sees Negative US Rating Trends Continuing In 2H

Last update: 7/1/2008 2:13:56 PM

     DOW JONES NEWSWIRES   

In its quarterly report on credit conditions for non-financial companies worldwide, Moody's Investors Service said while the second quarter saw a "very slight deceleration" in negative rating trends, they are expected to continue in North America.

Moody's also said the default rate has more than doubled in the past six months and is expected to surge for low-rated issuers as liquidity pressure builds.

The ratings agency noted that after the buyout of Bear Stearns Cos. by JPMorgan Chase & Co. (JPM) in late May, there was talk that the credit crunch might have been starting to ease. But as the anniversary of onset of the U.S. subprime credit crisis approaches, debt issuers around the world "still face significant challenges," Moody's said.

The firm said its broad credit outlook for nonfinancial companies in North America remains "strongly negative." In addition, the number of negative outlooks rose, which Moody's said sets the stage for ratings cuts in the second half of the year.

But the negative rating trend moderated a bit in the second quarter, which saw downgrades exceed upgrades by 2.7 times through June 23, compared with 2.9 times in the first quarter.

Moody's said commodity-price pressures became a bigger driver of downgrade actions. In addition, airlines and trucking companies have now joined home builders and restaurants as sectors where a majority of companies are either under review for downgrade or have negative rating outlooks, signaling more ratings cuts in those sectors in the second half.

At the end of the second quarter, 89% of home-building companies had negative outlooks and ratings under review for possible downgrade, with 70% of airline companies having such outlooks, 62% of trucking companies and 53% of restaurant companies.

The downgrades continue to be concentrated among lower-rated companies, as eroding liquidity and limited refinancing prospects push weak companies closer to default. In the second quarter, more than four times as many junk-rated issuers were downgraded as were upgraded. That compares with less than two times as many downgrades as upgrades for investment-grade issuers.

Moody's also said that consumer-related industries - which saw retail sales post a stronger-than-expected 1% gain in May amid the federal-tax rebate - will likely sag once the rebates are spent. The firm said experience from the 2001 tax rebate suggests that the stimulus payments will boost retail sales for about three to four months.

The ratings agency predicts that "when the impact of the stimulus has run its course, financially constrained consumers are likely to cut back further on spending," affecting a number of sectors that are sensitive to discretionary spending.

Meanwhile, Moody's noted that higher commodity prices are "potentially devastating for credit quality in the airline industry and a serious concern for other transportation sectors." But it added that for a few sectors, including oil and gas exploration and production companies, and mining and metals companies, revenue has been boosted by high prices, though margins are being pressured by rising costs.

Regarding the defaults, Moody's said at least 35 issuers have defaulted worldwide through late June - up 84% from defaults in all of 2007. All but one of the 35 defaults so far this year were North American companies.

In the rest of the world, the bond market showed signs of increased liquidity, although "ripples from the mortgage crisis and U.S. economic slowdown are still being felt," the ratings firm said.

-By Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@dowjones.com

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