The number of U.S. companies with the worst ratings fell to the lowest level in six months as borrowers benefit from years of almost zero short-term interest rates and policies that have supported market liquidity and economic growth, according to Moody’s Investors Service.
Issuers with a corporate-credit rating of B3 or below and a negative outlook dropped to 148 from 160 in June, and below the high of 290 in April 2009, Moody’s said in a report. Fifteen companies were added to the list and 27 were removed, four due to bankruptcy filings, in the three months ending in September.
The decline completes “the reversal of a move higher that began in March and peaked in June, shortly after the first indication that the U.S. Federal Reserve could begin to unwind its $85 billion a month bond-buying program,” analysts led by David Keisman, a senior vice president at Moody’s, wrote in the report.
Wilton Brands LLC, Dex Media Inc. (DXM) and AM General LLC were among the 15 companies added to the list this quarter, according to Moody’s. Cengage Learning Acquisitions Inc. and Exide Technologies (XIDEQ), both of which filed for bankruptcy, were among the companies removed.
An increase in ratings cuts in recent months could lead to an influx of companies onto the list if credit conditions deteriorate, the analysts wrote. Downgrades have exceeded upgrades of speculative-grade company ratings for the past six months, and did so in 11 of the last 12 months through July. The number of borrowers on review for a ratings reduction has also been larger than those on review for an increase every month since April 2012, according to the report.
“More companies are moving closer to this lower-rated territory,” Keisman wrote.
When credit conditions weaken “materially,” the list can increase “quickly,” as seen during the credit crisis when 73 companies were added during the first quarter of 2009 and 63 during the next three months of that year, according to the report.
Companies are added to the list when their credit rating falls to B3 negative or below. They are taken off the list after an upgrade to B3 stable or higher, through a default or a rating withdrawal.
Obligations rated B are considered speculative and are subject to high credit risk.
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