More Bonds -- and More Defaults
While global credit quality continued its three-year decline, two new records were set during the first quarter of 2001: new bond issuance volume in the U.S. and number of global defaults.
U.S. corporate straight bond volume for the first quarter 2001 rose 270% over the previous quarter to a record $150 billion on 300 issues. Investment grade issuance doubled to $120 billion (220 issues) and high yield issuance increased to $30 billion (79 issues) following only $4 billion in the previous quarter. While investment grade issuance has averaged $40 billion per month this year, high yield issuance has declined since the January high of $18 billion. Investment grade issuance benefited from bank debt refinancing, terming-out commercial paper and corporate expansion. In January, high yield issuance benefited from a stalled deal pipeline from fourth quarter 2000 and pent-up demand as credit spreads widened to over 1,000 basis points.
For the quarter, investment grade credit spreads averaged a consistent 233 basis points. Speculative grade spreads averaged 936 basis points, tightening in February from the January high, and then widening back out in March.
Investment grade spreads may benefit from further Fed tightening. We at Standard & Poor's expect the Fed to cut the funds rate 50 basis points at the May FOMC meeting and then another 25 basis point cut at the June meeting, bringing the rate to 4.25%. Speculative grade spreads continue to be under pressure amid credit quality and default concerns.
In terms of credit quality, during the first quarter of 2001, there were 313 global rating actions, with 70 upgrades and 243 downgrades, affecting $88 billion and$398 billion of rated debt, respectively. The ratio of global upgrades todowngrades continued to decline to 0.29 in 2001 first quarter from 0.35 in 2000, 0.39 in 1999, 0.50 in 1998 and 1 to 1 in 1997. Merger and acquisition activity continued to represent a less significant proportion of overall global rating actions, accounting for 2% of all actions in the first quarter 2001, compared with 8% in 2000 and 21% in 1999.
Globally, 22 companies' commercial paper ratings, affecting 80 programs, were downgraded, including DaimlerChrysler AG, Lucent Technologies Inc. and France Telecom. There were nine upgrades, affecting 18 programs.
Upgrades trailed downgrades across the globe. U.S. accounted for two-thirds of all global rating actions during the first quarter 2001. Excluding the rating actions resulting from the sovereign downgrade of Argentina, the U.S. accounted for three-quarters of global rating actions, the same as in 2000. U.S. first quarter upgrades trailed downgrades with a ratio of 0.26 to 1. Europe represented 9% of global rating actions where the ratio of upgrades to downgrades was slightly higher at 0.53 to 1. Asia-Pacific represented 6% of global rating actions and experienced a significantly lower ratio of 0.38 upgrades for every downgrade, compared to 0.82 in 2000. Latin America and Canada experienced upgrades to downgrades with ratios of 0.21 and 0.33 to 1, respectively. While these two regions combined accounted for 16% of global actions, the rating actions on Argentine issuers accounted for 80%.
There were two rising stars and 24 fallen angels in the quarter. Argentina's downgrades contributed to half of those fallen angels, while the remaining were in industrial (nine), utility (two) and telecommunication (one) sectors. Both rising stars, America Online Inc. and Battle Mountain Gold Co., were the results of mergers and acquisitions with Time Warner Inc. and Newmont Mining Corp., respectively.
Within the U.S., across all sectors: industrials, telecommunications, utilities, banking, and financial institutions/insurance, there were 41 upgrades ($61 billion of rated debt) and 160 downgrades ($159 billion). The U.S. industrial sector accounted for close to 77% of all actions within the U.S. The U.S. industrial sector experienced 35 upgrades ($53 billion) and 129 downgrades ($79 billion) in the 2001 first quarter.
In first quarter 2001, U.S. telecommunications experienced a large change since 2000 in upgrades to downgrades with a ratio 0.06 to 1, affecting $39 billion, down from a ratio of 0.41 to 1. U.S. utilities also experienced a large change in upgrades to downgrades with a ratio 0.22 to 1, affecting $40 billion, down from a ratio of 0.45 to 1.
Within the U.S. industrial sector upgrades trailed downgrades by 0.27 to 1. While this figure remains one of the lowest U.S. industrial upgrade to downgrade ratios in more than a decade, it is a slight increase over the second, third and fourth quarters of 2000 with ratios of 0.26 to 1, 0.22 to 1 and 0.23 to 1, respectively.
Most U.S. industrial subsectors experienced downward pressure with upgrades trailing downgrades. Downgrades were concentrated in the capital goods, consumer products and retail & restaurants subsectors, accounting for 31% of all U.S. industrial rating actions. In these subsectors there were 6 upgrades ($14 billion) and 51 downgrades ($21 billion).
Merger and acquisition-related rating actions alone accounted for 3.7% of all actions in the U.S. industrial sector with 4 upgrades and 2 downgrades. When merger and acquisition-related rating actions are excluded, the ratio of upgrades to downgrades in the U.S. industrial sector was 0.24 to 1 during first quarter 2001.
Speculative-grade rating actions accounted for approximately 79% of all U.S. industrial rating actions during first quarter 2001 compared with 74% and 87% of all actions in 1999 and 2000, respectively.
The ratio of upgrades to downgrades in the high-yield U.S. industrial sector was 0.29 to 1, higher than the previous two years of 0.26 to 1 and 0.14 to 1 in 1999 and 2000, respectively. Conversely, the ratio of upgrades to downgrades in the first quarter 2001 of the investment-grade sector was 0.21 to 1, the lowest ratio in over 14 years.
Rating actions in the high-yield rating categories led actions across the U.S. industrial sector. Rating actions in the 'B+' rating designation accounted for 15% of all U.S. industrial rating actions while actions in the 'BB-', 'B+', and 'B' rating designations accounted for 37% of all U.S. industrial rating actions.
Rating outlooks on 92 global industrials were revised to negative during the quarter. Of these issuers, 52 with stable outlooks were revised to negative and 40 were placed on CreditWatch with negative implications. Hardest hit were consumer products, high technology and retail/restaurant sectors.
Defaults on rated bond issuers hit a record with 40, affecting $24 billion. With 19 in February, another record was set. 18% of the defaults were in the telecommunications sectors, followed by consumer products (13%), metals and mining (13%) and retail/restaurants (13%). Despite the default slowdown in March, we at Standard & Poor's expect defaults to set another record in 2001.
From Standard & Poor's CreditWire