Credit quality improved but spreads widen in Q2, says S&P

Rating agency Standard and Poor’s (S&P) said global credit quality continued to improve in the second quarter of 2002. The global downgrade-to-upgrade ratio, which was 7:0 in the final quarter of 2001 was 5:3 in the first quarter of 2002 and 3:1 for the second quarter of 2002. The ratio represents a total of 253 downgrades and 82 upgrades for the second quarter, compared with 303 downgrades and 57 upgrades last quarter.

“Even though the global tally of downgrades should continue to decline in the second half of the year, additional downward pressure on credit quality could materialise if further accounting irregularities surface or earnings restatements emerge,” said S&P in a statement.

But volatility in US industrial credit spreads has increased from the first quarter of 2002. Speculative-grade credit spreads, which were at 600 basis points at the end of the first quarter, ended the second quarter at 710bp. Investment grade credit spreads also increased from the first quarter and were recorded at 170bp on June 28. “Even though the Federal Reserve is expected to keep benchmark interest rates on hold in the US until early next year, spreads – both speculative grade and investment grade – will remain vulnerable to recurring ‘headline risk’,” the forecast update stated.

The statement said new issue volume in the US will “fail to match last year’s stellar levels”. This is due to decreased refinancing of bank debt and commercial paper, and the expected lack of a revitalisation of capital spending by businesses. But S&P said there would be some opportunistic issuance while interest rates remain relatively low.

Issuance volume fell 18.4% in the US to $404.9 from last year. New issue volume also fell in the EU, where subdued merger and acquisition activity and poor earnings and profitability outlooks were to blame for the decrease.

S&P said emerging market corporate bond issuance picked up in the second quarter, spearheaded by Asia-Pacific issuance. However, the forecast remains unclear: while the outlook for Asia is positive, S&P said gains in Asia will be counterbalanced by downbeat prospects from Latin America.