Weakening of credit quality slows in July, Moody's says

By Peter Heap

New York, Aug. 1 - The deterioration in corporate credit quality slowed in July, according to Moody's Investors Service.

But the rating agency cautioned it is too early to conclude that the second quarter was the peak of the current cycle.

During the month, Moody's lowered credit ratings on 38 corporations compared to 13 upgrades.

But the 2.9:1 ratio of downgrades to upgrades was an improvement from the second quarter's 4.9:1.

However Moody's analyst John Puchalla cautioned in a report that the ratio can be volatile from month to month.

He also noted that the 2.9:1 ratio does no more than match the figure for all of 2001, which was the weakest year since the early 1990s.

"The still wide excess of the dollar amount of downgrades over upgrades and a preponderance of downgrade reviews suggest credit risks remain high," Puchalla wrote. "Corporate earnings must rebound and the equity market must stabilize to produce a definitive bottom in the credit cycle."

By dollar value, there were $63.5 billion of downgrades and $37.9 billion of upgrades although the upgrade figure was largely made up of $35.9 billion from the upgrade to US Bancorp.

For non-financial companies, the figures were $60.8 billion of downgrades and $1.7 billion of upgrades, a 37:1 ratio which was above the 22:1 level for the first half of the year and far higher than the record 5.8:1 for a year recorded in 2001.

Of the 38 rating reductions, 10 were to utilities, seven to energy companies and four to telecommunications companies.

Utilities, energy and telecom also accounted for 17 of the 35 reviews for downgrade in July.

Puchalla said the concentration of downgrades and reviews for downgrades hints that credit pressures might be easing outside of utility, energy and telecom.

"However, weak credit quality in those three sectors can still have broader ramifications to the extent credit losses prompt a pullback in liquidity to other sectors," he added.

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