Fitch Releases U.S. Corporate Bond Market Third Quarter Review

NEW YORK--(BUSINESS WIRE)--The par value of U.S. corporate bonds affected by upgrades totaled $32.6 billion in the third quarter, or 1.0% of market volume, while downgrades totaled $70.5 billion, or 2.2% of outstanding U.S. corporate bonds -- double the rate of upgrades, according to Fitch Ratings.

Rating changes were generally small both on the upside and the downside across the investment grade rating categories, with the exception of 'BBB' downgrades, which affected nearly 2% of the category's bonds.

At the speculative grade level, upgrades in the third quarter totaled $17.7 billion while downgrades moved dramatically up to $52.9 billion, a quarterly level not seen since the recession. The negative speculative grade rating results were due mostly to downgrades of Ford Motor Company (Ford).

On a quarter-over-quarter basis, issuance was down across both the industrial and financial sectors.

'Investment grade issuance was down quarter over quarter but continued to run ahead of 2005 activity. In contrast, speculative grade bond issuance was down quarter over quarter and year-over-year. The heated pace of leveraged loan issuance continued to dampen high yield bond deal volume' said Paul Mancuso, Senior Director, Credit Market Research.

Sectors experiencing year-over-year declines in issuance included, among others, building and materials, gaming, lodging & restaurants, retail, paper and forest products, consumer products, and insurance.

Industrial companies continued to strongly favor long term issuance with nearly 60% of new bond sales carrying maturities of 10 years or longer in the third quarter. The share of industrial new issuance with maturities of five years or less saw a small increase, growing from 3.3% to 5.8% of total issuance in the third quarter - the bulk of the shorter term bonds consisted of floating rate bonds.

The median fixed coupon of new issues fell across all rating categories except the 'B' and 'CCC - C' pools, perhaps an indicator that the market's risk appetite is finally being tested with the significant number of aggressive deals coming to market, especially those supporting LBOs.

When examining the market's rating mix across the pool of industrial bonds, the share of bonds rated speculative grade totaled 32% of market volume at the end of the third quarter, a level above its pre-recession level of 26%.

'The move down the rating scale among U.S. industrials, at first due mostly to the impact of fallen angels suffering from operating shortfalls, has continued unabated in 2006 as management's focus has continued to shift from balance sheet management to shareholder friendly transactions such as LBOs, M&A and share buybacks' said Mariarosa Verde, Managing Director of Credit Market Research.

Due to strong credit availability, the lowest rated issuers appear to have been successful in pushing out bond maturities. While a positive in terms of near term bond refinancing risk, strong issuance volumes in the leveraged loan market suggest that many high yield borrowers have simply shifted their funding from the bond to the loan market and refinancing risk may be more of a concern on maturing loan balances rather than bonds.

The new report is titled 'U.S. Corporate Bond Market: Third Quarter 2006 Review' and includes a detailed look at rating activity, issuance patterns and bond maturities through the first nine months of 2006 for both the investment grade and speculative grade portions of the market and by industry.

The new report is available on the Fitch Ratings web site at www.fitchratings.com under the 'Credit Market Research' link.