The pace at which high-yield borrowers in the U.S. are lifted to investment grade is accelerating from the slowest start to a year since at least 1987 as Fitch Ratings elevates Ford Motor Co.
Standard & Poor’s has upgraded five borrowers from speculative grade since February, bringing the total of so-called rising stars this year to six. Fitch cited improved earnings, reduced pension costs and cash on hand as it raised Dearborn, Michigan-based Ford to BBB- yesterday, the first time since 2005 that the biggest high-yield issuer has been ranked above junk by any of the three largest ratings firms.
The riskiest borrowers from Ford to CIT Group Inc., the small-business lender that exited bankruptcy two years ago, are improving their creditworthiness as yields close to record lows allow them to reduce expenses by refinancing debt. Corporate balance sheets are improving with about 82 percent of the 125 companies in the S&P 500 Index that have released earnings since April 10 reporting profits that beat analyst forecasts.
“We’re seeing gradually improving credit quality” that should lead to more upgrades, said Greg Kocik, a Toronto-based money manager with the TD High Yield Bond Fund who oversees $1.6 billion. “People who take money out of a BB+ name like Ford will put money into another company on the cusp of investment grade. There should be some movement of that capital into other upgrade candidates.”
The world economy is set to expand 3.5 percent this year, the Washington-based IMF said April 17 in its World Economic Outlook, boosting its forecast from 3.3 percent in January.
“As the economy grows, we expect rising star potential to slowly increase to an eventual peak at some point in the middle of the current business cycle,” Diane Vazza, an S&P analyst in New York, wrote in an April 13 note. The six rising stars this year compares with a median of 13 in the same period over the past five years, she said. S&P is monitoring the debt of 23 borrowers poised to be lifted from junk.
Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk fell for a second day, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, declining 1.2 basis points to a mid-price of 98.5 basis points as of 11:41 a.m. in New York, according to prices compiled by Bloomberg.
Rate Swap Spreads
The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default 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.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, fell 1.6 basis points to 29 basis points as of 11:42 a.m. in New York. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of General Electric Co. are the most actively traded U.S. corporate securities by dealers today, with 141 trades of $1 million or more as of 11:40 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Fairfield, Connecticut-based company’s financing arm, GE Capital Corp., sold $3.1 billion of bonds yesterday and plans to offer $700 million of debt today.
The riskiest borrowers are benefiting from refinancing or issuing new debt at yields that this year are averaging 7.82 percent on the Bank of America Merrill Lynch U.S. High Yield Master II index. Yields reached a record low 7.19 percent on May 19, 2011, after declining from 22.65 percent at the height of the credit crisis in December 2008.
The five borrowers that S&P has upgraded from junk since February are BRF-Brasil Foods SA, the sovereign debt of Uruguay, LyondellBasell Industries NV, Regions Financial Corp. and Mohawk Industries Inc. Starwood Hotels & Resorts Worldwide Inc. was the only speculative-grade company to get boosted to investment grade this year, according to S&P research as of March 14, the slowest start to a year since at least 1987.
The number of global fallen angels for 2012, or companies that declined to junk from investment grade, was 11 as of April 9, five less than the total for the same period of 2011, S&P said on April 13.
High-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
Ford Chief Executive Officer Alan Mulally has sought to restore the automaker’s investment-grade rating to reduce borrowing costs and attempt to recover major assets put up for collateral as the company borrowed $23.4 billion in late 2006 to avoid the bailouts and bankruptcies that befell the predecessors of General Motors Co. and Chrysler Group LLC.
Ford ended 2011 with its 11th consecutive profitable quarter and earned $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008.
“The upgrade of Ford’s ratings reflects the automaker’s significantly improved financial performance, balance sheet repair, and product portfolio improvement that have taken place over the past several years,” according to the report from Fitch analysts led by Stephen Brown and Mohak Rao.
Risks to Ford include the strength of the global economic recovery and demand for automobiles, while in the U.S. high unemployment and gasoline prices could be a drag on growth, Fitch said.
S&P and Moody’s will likely follow Fitch in upgrading Ford, Barclays Plc strategists Vincent Foley and Cedric Morris in New York said in a research note yesterday.
“Mid-2012 is a realistic timeframe for Ford to achieve investment grade ratings at all three rating agencies,” Foley and Morris wrote.
That would make the automaker the biggest rising star in history, Barclays analysts led by Bradley Rogoff in New York wrote in February.
New York-based CIT sold $1.5 billion of senior unsecured six-year notes last month after the small-business lender led by John Thain redeemed $4 billion of debt tied to its exit from bankruptcy in December 2009 and S&P boosted its credit rating to BB- from B+.
Investor anxiety is rising this month with S&P’s so-called distress ratio climbing to 12.4 percent from 10.8 percent in March amid concern that Europe’s sovereign-debt crisis is reigniting, the ratings company said. The ratio is a measure of the number of distressed securities divided by the total number of speculative-grade issues.
In the U.S., while gross domestic product grew at a 3 percent pace in the last three months of 2011, it will slow to 2.3 percent this year, according to the median estimate of 74 economists surveyed by Bloomberg. Projections for GDP growth this year are slower than the 3.1 percent posted in 2005 and 2.7 percent in 2006 before the recession and financial crisis.
“Investors are optimistic about a U.S. turnaround but they are still very worried about what’s going on in Europe,” said Marc Gross, a money manager at RS Investments in New York who oversees $3 billion in fixed-income funds. Budget cuts across the continent and slower Chinese growth are among the global economic concerns, he said.
“The general trend is that corporate earnings have been solid and leverage has been managed, so we should be in more of an upgrade cycle in the U.S.,” Gross said.
Moody’s tallied eight rising stars in March versus four fallen angels, the ratings firm said April 9.
“We are at a point in the cycle where companies have had time to grow and repair balance sheets to improve credit quality,” Susanna Gibbons, a portfolio manager at RBC Global Asset Management, which oversees more than $250 billion in assets, said in a telephone interview. “You will probably see a trend in rising stars just because of continued support from the economy.”