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.