Bog of bad ratings growing bigger and harder to escape, says Moody’s

Number of companies with weak ratings has swelled, with private equity-owned firms getting greater representation

Bog of bad ratings growing bigger and harder to escape, says Moody’s

The number of companies with weak credit ratings has grown as vulnerable companies find it harder to get away from their unfavourable assessments, according to Moody’s Investors Service.

In a report released last week, Moody’s said that just 12% of companies rated at or below B3 with a “negative” outlook warranted upgrades to get promoted out of the risky group. That’s in contrast to 20% in 2018.

As reported in Institutional Investor, those that do escape the list of speculative-grade companies that are at least six levels below investment-grade typically do so due to default. The last quarter of 2019 marked a five-quarter streak in which defaults were the main reason for such companies to be removed.

The number of companies ranked at or below “B3” negative reportedly swelled 10% last year; 22% of companies on its B3 “negative” list fell deeper into high-yield territory without defaulting.

“Credit-negative sentiment picked up during 2019,” Moody’s said.

Of the companies with B3 “negative” ratings or lower, some 80% had Caa ratings — at least seven levels below investment-grade — most of which were owned by private equity firms. In 2018, Moody’s issued a warning on an “alarming” number of private equity-owned companies with weak ratings, which it said may lead to a surge in defaults.

In Thursday’s report, Moody’s said that Caa-rated companies are benefiting from the longest U.S. economic expansion in history. “These companies managed to stay afloat due to accommodating capital markets, loose covenants embedded in their credit agreements and indentures, and a still-benign economic backdrop,” it said.

While the number of low-rated companies grew last year — with most new additions coming from the business, consumer services, and oil and gas sectors — it was still 30% below the high water mark of 291. A Moody’s spokesperson said the dubious record was set in 2009 as U.S. companies struggled to recover from the Great Recession, and was reached again in 2016 as energy-sector company defaults picked up after a plunge in commodity prices.

The report said that the U.S. speculative-grade default rate stood at 4.2% by the end of 2019, compared to 2.8% the previous year.

“We expect the default rate in the U.S. will moderate to 3.5 percent by the end of 2020, considering no severe deterioration in our macroeconomic assumptions,” Moody’s said.


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