Utilities, telecom, energy dominate downgrade reviews, Moody's says

New York, July 2 - Utilities, telecommunications and energy companies dominated the ratings put on review for possible downgrade in the second quarter, according to Moody's Investors Service.

Of the total 80 reviews for downgrade begun in the quarter, utilities accounted for 28, telecom for 17 and energy for eight - a total of 53 or 66% of the overall figure.

Those three industries combined accounted for only 20 of the 80 reviews for downgrade in the first quarter.

Debt financing of acquisitions and large capital spending requirements, growth in unregulated business lines and adverse regulatory rulings on rate hike and surcharge requests contributed to the 28 reviews for downgrade to utilities, Moody's said.

Slower subscriber growth that might signal faster-than-anticipated industry maturation contributed to downgrade reviews of 13 wireless telecommunications firms at the end of June, Moody's added. Excess capacity, low or negative EBITDA, significant capital expenditure needs and amortization of secured bank debt and vendor financing increased credit risks as growth in revenues has slowed.

For 17 telecom and an additional four hi tech companies, a slump in demand and capital spending on optical networking and storage products, telecommunications equipment, semiconductors and memory chips contributed to downgrade reviews, Moody's said.

The eight downgrade reviews of energy companies did not differ much from the total of seven in the first quarter. Moody's said debt financing of capital spending and acquisitions as opposed to declining revenue, earnings and product prices were the primary factors behind energy company downgrade reviews.

The increase in these three industry sectors contrasts sharply with the reduction in reviews for downgrade in most other industry groups, Moody's noted.

While the number of downgrade reviews held constant, the number of upgrade reviews increased to 18 in the second quarter from a record low of 10 in the first quarter, Moody's said.

"Rating reviews hint that credit deterioration will persist into the third quarter," commented Moody's analyst John Puchalla in a report on the data. "De-leveraging and an improving profit outlook should lead to more upgrades but the number of downgrades will likely remain at a high level."

He added that the rise in reviews for upgrade was largely the result of an increase in rating actions linked to equity offerings and merger and acquisition activity.

The only industry groups to have more upgrade than downgrade reviews were healthcare and financials.

The number of consumer cyclical firms placed on review for downgrade dropped sharply to just five in the second quarter from 23 in the first quarter. Reviews for upgrade in this sector rose four from one.

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