High yield ratings see worst quarter since last recession, Moody's says

By Peter Heap

New York, Oct. 5 - High yield credit quality suffered its worst quarter since the last recession, according to a new report from Moody's Investors Service.

During the third quarter, the rating agency said it made 4.89 downgrades for every upgrade. That was the highest figure since the 5.73:1 ratio during the first quarter of 1991.

Moody's analyst John Puchalla wrote that the quarter was already "bad" even before the Sept. 11 terrorist attacks, with a 3.89:1 downgrade to upgrade ratio before Sept. 11. But after that point Moody's cut ratings on 19 credits and made no upgrades.

However Puchalla noted there have been a few upgrades so far in October.

By dollar value, Moody's said the third quarter was the worst ever for downgrades and also as a percentage of junk bonds outstanding.

During the three months, $105.9 billion of high-yield debt saw a ratings reduction from Moody's, well above the previous peak of $75.8 billion in the fourth quarter of 2000.

The total was 18.9% of the $559 billion of junk bonds outstanding at the end of June 2001, according to Moody's estimates. That percentage was also a record, beating the previous high of 15.1% set in the first quarter of 1990.

Analyzing the dollar total, Puchalla said commercial airlines accounted for the three largest speculative-grade downgrades in the quarter. The next six largest were telecommunications companies.

Overall, commercial airlines made up eight of the quarter's 93 downgrades for a total of $45.6 billion of debt, 8.6% of the total number but 43% of the dollar amount, Puchalla said.

The 19 telecommunications downgrades affected $38.8 billion of outstanding bonds. Puchalla noted that 11 of the downgrades were to companies rated B3 or lower, showing the "fragile credit position of many telecom firms."

Companies exposed to consumer spending were also heavily represented, Puchalla said. Retailers made up nine downgrades with $3 billion of bonds and auto parts suppliers saw eight downgrades totaling $6 billion.

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