Although economic growth has resumed, the increase in corporate expenditures wasn’t great enough to stem the rising tide of credit-rating downgrades during the second quarter, said Moody’s Investors Service last week. In fact, it reported that credit-rating downgrades exceeded upgrades by a margin of 4.9-to-1 during the period, the highest ratio since the record 6.3-to-1 in the fourth quarter of 1990.

Moody’s said increased emphasis on de-leveraging and a firming of corporate earnings contributed to some improvement in review and outlook changes during the second quarter, signaling perhaps that credit deterioration could begin to slow over the next year.

“When both corporate bonds and stocks rallied, coming out of the previous recession, the downgrade-per-upgrade ratio of U.S. company credit-rating revisions sank from Q4 1990’s high of 6.3:1 to the 1.8:1 of Q4 1991. Once again, a decisive drop by the incidence of downgrades relative to upgrades might thin corporate bond yield spreads and change the direction of share prices,” said Moody’s chief economist John Lonski.

According to the rating agency, there were 172 downgrades during the second quarter of 2002 affecting $333 billion of bonds, compared to 35 upgrades affecting $49.7 billion of bonds. The utility, energy and telecom industries saw most of the credit downgrades, brought on by accounting and disclosure irregularities, as well as a slump in merger and acquisition (M&A) activity, it said. Health care and financial institutions had the most upgrades.

“Falling asset prices, excess capacity and weak capital spending — particularly in energy, telecom and high tech — helped credit-rating downgrades far outnumber upgrades,” said Moody’s senior economist John Puchalla. “While efforts to pare leverage will be helpful, a definitive firming of corporate credit worth will be difficult to realize until revenues improve and corporate profits strengthen.”

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