Risk Appetite Remains Elevated For U.S. High-Risk Prospects, Says Report
Of the 1,237 U.S. high-yield parent-level issuers rated by Standard & Poor’s Ratings Services at the end of January 2007, we evaluate the prospects for 1,194 issuers with outstanding debt in a report published late Friday. The article, which is titled, “U.S.
High-Yield Prospects: Marking Time,” says a study of their CreditWatch and outlook status identified 133 issuers as potential upgrade candidates (three less than in December 2006), with 11 issuers-three each in the utility and insurance sectors and one each for capital goods, chemicals, health care, home builders and high technology-seen as potential rising star candidates. While 56% of issuers present a stable profile, 30% are seen as subject to downgrade risks; the latter is 1% lower than in December, as 21 entities were removed and 14 added to the potential bond downgrade list. “Risk appetite remains elevated, as seen in tight spreads. Our data shows record recovery rates on defaulted bonds in an environment of ample liquidity, which has dulled risk perceptions,” noted Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “While problems with subprime mortgage lending have not spilled over to other high-risk assets, idiosyncratic risk could escalate to systemic risk as profit growth falters.” The bifurcation in credit quality prospects in the issuer universe continues. The percentage of high-yield issuers on CreditWatch with negative implications or negative outlook exceeded those on CreditWatch or outlook positive by an 18.3% margin, or 2.3% higher than a year ago. In contrast, this was 5.8% for investment-grade issuers, or 1% lower than a year ago. In addition, supply pressures will increase. We expect $145 billion in gross high-yield issuance in 2007, up from $135 billion in 2006. High-yield issuers have been conducting huge M&A and LBO deals in the leveraged loan market, where volumes reached a heady $481 billion last year, and another $84 billion has come already come to market in 2007. This dynamic should persist in 2007, but pressures should build as the leveraged loan default rate also climbs towards 2.0% from its meek 0.78% rate in January. Ms. Vazza added that “As before, firms in media and entertainment, consumer products, telecommunications, retail and restaurants, health care, and automotive remain susceptible to the highest downgrade risks. Firms in aerospace and defense, utility, high technology, along with the chemical, packaging, and environmental services sector, have the greatest upgrade potential.” The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com . The report is also available at www.sandp.com/gfir , listed under Global Fixed Income Research. If you have not previously registered with the site, you will need to do so to access this material. Registration requires minimal information and is free. Members of the media may request a copy of this report by contacting the media representative name provided.
Media Contact: Analyst Contact:
Diane Vazza, New York (1) 212-438-2760