U.S. Bond Upgrades Beat Europe’s at Record Pace: Credit Markets
U.S. credit quality is improving relative to Europe at a record pace, reflecting faster economic growth in North America and ratings downgrades of nations from Ireland to Greece.
Standard & Poor’s ratio of U.S. upgrades to downgrades is 1.07 this year, compared with 0.46 in Europe, the widest gap ever, according to data compiled by Bloomberg. S&P lifted the ratings of 455 U.S. issuers including Starwood Hotels & Resorts Worldwide Inc. and lowered 427. In Europe there were 102 upgrades, including France’s second-largest automaker Renault SA, versus 224 cuts.
The U.S. is benefiting as the Federal Reserve pumps money into the economy and investors snap up riskier assets, allowing the neediest borrowers to access capital and refinance debt. Europe, where interest rates are also at record lows, is lagging behind, mired in a sovereign-debt crisis and a slow-growing economy fettered by the strong euro.
“The potential for additional downgrades is the highest in Europe,” said Diane Vazza, head of global fixed-income research at S&P in New York. The region “is plagued by sovereign-debt uncertainties and expectations for a slow economic recovery,” she said.
Default Swaps Fall
Moody’s Investors Service also favors U.S. corporate and sovereign credit quality over Europe’s. The ratio of upgrades to downgrades by Moody’s in the U.S. this year is 1.43, compared with 0.25 in Europe. The firm upgraded 429 U.S. issuers and cut 301. The difference between the two regions is a record 1.18.
The gap has grown wider this quarter, according to S&P data. The difference between the upgrade-downgrade ratios rose to 1.37 during this three-month period, from 0.02 in the previous quarter, the data show. Moody’s numbers show the gap fell to 0.46 from 1.38.
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds worldwide rather than government debt was unchanged yesterday at 165 basis points, or 1.65 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
The cost of protecting corporate bonds in the U.S. from default fell. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on company debt or to speculate on creditworthiness, dropped 0.9 basis point to a mid-price of 86.85 basis points as of 12:18 p.m. in New York, according to index administrator Markit Group Ltd.
The index typically falls as investor confidence improves and rises as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
HCA Inc., the hospital chain acquired four years ago in a $33 billion leveraged buyout, plans to sell $1.525 billion of senior unsecured notes as soon as tomorrow, according to a person familiar with the situation, who declined to be identified as terms aren’t set.
The company will sell the debt coming due in 2021 through its HCA Holdings Inc. unit, according to a statement distributed today by Business Wire. Proceeds, along with borrowings under the company’s credit facility, may be used to fund a dividend for private-equity owners, the statement said.
Europe’s slow economic recovery in the wake of the region’s sovereign deficit crisis is hurting the credit profile of its borrowers compared with the U.S.
The Washington-based International Monetary Fund forecasts the U.S. economy will expand 2.6 percent this year and 2.3 percent in 2011, compared with 1.7 percent and 1.5 percent for the euro region. The dollar has weakened against all 16 major currencies since the end of June, while the euro has strengthened versus 14, making Europe’s exports less competitive, data compiled by Bloomberg show.
“The strength of the euro is starting to take its toll, even on Germany,” Europe’s biggest economy, said Ian Stannard, a currency strategist in London at BNP Paribas, the world’s largest bank.
U.S. investment-grade bonds have proven to be a better bet this year, returning 11.9 percent, compared with 6.8 percent for European debt, according to Bank of America Merrill Lynch index data. The difference in performance has grown wider this quarter, with U.S. debt handing investors 0.53 percent compared with 0.18 percent for European notes.
Reductions in sovereign ratings are affecting Europe’s corporate sector, leading to cuts of government-owned companies and banks whose credit depends in part on the strength of the nation in which they’re based.
When Portugal had its rating lowered two levels to A- by S&P on April 27, electricity and gas utility REN-Redes Energeticas Nacionais SA, which is part-owned by the government, was also cut. Portuguese lenders Banco Santander Totta SA, Caixa Geral de Depositos SA, Banco Espirito Santo SA, Banco BPI SA and Banco Comercial Portugues SA had their ratings reduced on the same day.
Reducing Greece’s rating three levels to BB+, also on April 27, prompted S&P to downgrade Greek lenders including EFG Eurobank Ergasias SA, Alpha Bank AE and National Bank of Greece SA. Spain was cut one level to AA by S&P the next day, bringing railroads, municipalities and banks down with it.
S&P lifted Boulogne Billancourt-based Renault one level to BB+ last week after France’s second-largest carmaker raised 3 billion euros selling shares in Volvo AB. The New York-based firm in October raised Starwood Hotels of White Plains, New York, to BB+ from BB, citing the “improving global lodging environment.”
S&P cut Ireland one level to AA- in August and left the outlook negative to signal it may cut again, citing the spiraling cost of rescuing the nation’s banks. BT was cut in February because of the cash-flow drain represented by the company’s pension deficit.
Morgan Stanley analysts forecast speculative-grade U.S. company bonds will continue to outperform European debt because of the growth outlook and the different approaches of the regions’ central banks to supporting the economy.
Fed Chairman Ben S. Bernanke announced a second round of so-called quantitative easing on Nov. 3, with a $600 billion plan to buy Treasuries in an attempt to avert deflation and stabilize the economy. The following day European Central Bank President Jean-Claude Trichet signaled he intends to stick to a strategy of pulling back from emergency stimulus measures.
“Looking across multiple avenues -- the macro picture, technical flows and relative fundamentals -- we still believe U.S. credit is positioned to outperform,” Morgan Stanley analysts led by Adam Richmond in New York wrote in a client note on Nov. 5.
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