US corporate rating near 10-year low, says Moody’s

New York, Dec 6: US corporate credit quality, battered by the September 11 attacks, is falling fast and on pace to suffer its worst year in a decade, Moody’s Investors Service said on Wednesday.

"There’s a sense among some that when the attacks took place, the corporate credit cycle was in the process of forming a bottom," said John Lonski, Moody’s chief economist. "That view," he continued, "was changed radically by the (resulting) damage to corporate debt protection." In November alone, the rating agency, which assesses companies’ ability to repay debt, downgraded 64 companies’ ratings, the most in a month since it downgraded 81 in January, when California’s power crisis was in full bloom. And since Sept. 11, Moody’s has downgraded 151 companies and upgraded 46, a 3.3-to-1 ratio. The ratio this year had been 2.8-to-1 before the attacks, and was 2.3-to-1 last year. Few sectors have been spared, Lonski said.

Travel-related industries, especially commercial airline operators, have fared particularly poorly, while in high technology and especially telecommunications, "problems keep popping up over and over again." In contrast, he said financial companies, battered during the last recession, have on balance fared far better, having improved their balance sheets during the 1990s economic boom. But some of the highest-profile downgrades -- those to "junk" status from investment-grade -- have had little to do with the economy, Moody’s said.

Since June 2000, Moody’s has downgraded 70 companies’ ratings to "Ba1" or lower from "Baa3" or higher, including a record 51 this year. Such downgrades raise borrowing costs and can make it tough for some companies to raise money at all. Yet Moody’s said 40, or 57 per cent, of these "fallen angels" -- including energy trader Enron Corp and California’s utilities Pacific Gas & Electric Co and Southern California Edison -- fell because of "special events" such as mergers, equity buybacks, litigation, the California power crisis, fraud -- and the attacks.

"The latter," Lonski said, "reminds us of how the business cycle can be shaped by developments well beyond the ordinary realm of economics." For all of 2001, Moody’s is projecting that downgrades will outpace upgrades by a 2.9-to-1 ratio. That’s the worst since the 2.93-to-1 ratio in 1991, when the US economy last emerged from recession. "Until corporate revenues and earnings rebound, investors should be cautious about underestimating the risks of a continued deterioration in corporate credit quality," wrote John Puchalla, Moody’s senior economist, in a report.

— Reuters