Quarter's weak credit quality turns worse after attacks, Moody's says

By Peter Heap

New York, Sept. 27 - An already weak quarter for corporate credit quality worsened further after the Sept. 11 terrorist attacks, Moody's Investors Service said late Wednesday.

Downgrades were already ahead of upgrades for the quarter before the tragedy but the gap widened subsequently, according to a report by Moody's analyst John Puchalla.

Ahead of the attacks, the high-yield downgrade-to-upgrade ratio was at 3.53:1, he said. With 12 downgrades and no upgrades subsequently, the ratio is now at 4.16:1 with only days to go in the third quarter.

Puchalla added that the ratio could pass the recent peak of 4.17:1 set in the fourth quarter of 2000, which was the worst performance since 4.69:1 in the second quarter of 1991.

For all corporates, the 2.52:1 ratio so far this quarter is slightly better than 2.62:1 for the second quarter, Puchalla said. But the ratio jumped to 2.13:1 before Sept. 11 to 10.5:1 after.

For investment-grade credits only, the downgrade-to-upgrade ratio is now at 1.17:1 compared to 1.85:1 in the third quarter. However since Sept. 11, Puchalla said Moody's has downgraded nine names - including four reductions related to debt-financed acquisitions - and upgraded only two. In addition, reviews for downgrade are running far ahead of reviews for upgrade.

One of the biggest factors since Sept. 11 in both high-yield and investment-grade sectors is commercial airlines. Moody's has cut three formerly investment-grade carriers to junk and a further seven already high yield companies were downgraded.

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