Potential Bond Upgrades Reach Record High In January 2006 - S&P
NEW YORK Jan. 31, 2006--The number of entities poised to benefit from potential upgrades in January 2006 reached a record high since we began reporting on this topic in 2003, according to a report published today by Standard & Poor's Ratings Services. The article, which is titled "Upgrade Potential Across Credit Grades And Sectors Regains Momentum," says that January's tally was 349, 14 more entities than the 335 mentioned in our December report. By sector, banks, insurance, and aerospace and defense appeared especially well placed for potential upgrades.
"Even though credit fundamentals remain benevolent at this late stage of the credit cycle, the roster of issuers expected to benefit from potential upgrades will diminish over time," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Factors that are supportive of potential upgrade momentum are weakening from peak levels." Credit spreads, which have already expanded from recent lows, will maintain their slow upward creep in the next 12 months as markets re-price risk. Furthermore, a pickup in debt-financed mergers and acquisitions could also constrain credit-quality improvement, as it is a break from the balance-sheet conservatism that characterized corporate behavior during the recent deleveraging cycle. A higher volume of low-grade issuance--resulting in part from increased leveraged buyout activity--also serves as an early warning of default pressure in 2006 and beyond, though the increases are still a fraction of long-term default rates. Furthermore, corporate profitability will diminish relative to prior years as input costs increase and earnings decelerate in a macroeconomic environment characterized by less-robust GDP growth and rising prices.
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