S&P: Junk Bond Downgrades Lower YTD In 2003

August 1, 2003 (PLANSPONSOR.com) - Year-to-date, the number of corporate debt instruments downgraded to "junk" status is down to 40, compared to 46 at this time in 2002.

Should this trend of lower junk bond downgrades continue, the number of companies downgraded would be lower than the previous year for the first time since 1996, a sign that perhaps credit ratings are ready to reverse course to head upward.   This comes not a moment too soon either; last year saw a record 84 companies with $215 billion in debt cut to junk globally as accounting scandals and a sluggish economy took a toll, according to a Standard & Poor’s report.

In turn, last year’s slew of downgrades contributed to a bruising selloff in the corporate bond market.   This was due to a combination of institutions being prohibited by their investment guidelines from owning junk bonds and investors wary of the potential for a massive fallout.

However, year-to-date in 2003, only 40 companies worldwide with $56.9 billion in debt have been cut to junk compared with 46 companies and $117 billion of debt in the same period last year.   Included in this group was:

  • J.C. Penney Co.
  • ABB Ltd.
  • Ahold NV
  • Tenet Healthcare Corp.

Looking across the globe, S&P says capital goods have generated the most downgrades so far in 2003, due to a slump in business investments hurting the sector. However, high technology may see the most downgrades by year-end as weak business conditions weigh on profits.