Out of the Junk Pile?
By Michael Kaye, CFA
Even after several quarters of turbulence in global credit markets -- and a high level of ratings downgrades -- there are some rated companies that have bucked the trend and currently stand to benefit from potential bond rating upgrades, according to a study released by Standard & Poor's Ratings Services on May 12.
The study listed 189 companies that Standard & Poor's has flagged with one of two of its proprietary ratings designations. The companies were either on CreditWatch with positive implications, or had what S&P terms a "positive outlook." CreditWatch is S&P's indicator of the potential direction of a credit-rating change, dependent on identifiable events and short-term trends. A company's CreditWatch standing is typically resolved within 90 days. A rating outlook indicates the potential direction of a credit rating change within six months to two years.
The possibility of a credit rating upgrade is positive for a company in two respects. It is often a sign that a company's financial strength has improved. And if the rating is indeed raised, it can often result in lower borrowing costs for the company.
We looked at the list of companies in line for upgrades and sorted for those with an S&P debt rating of 'BB' or 'BB+'. Our reasoning: If a company's S&P credit rating is upgraded from 'BB' to 'BBB', it goes from "junk" status to investment grade.
And then we used one final filter, this time from S&P's equity research side. We looked for companies whose shares are ranked either 4 STARS (accumulate) or 5 STARS (buy) by S&P equity analysts. That means that they are expected to outperform the broader market over the next 6 to 12 months.
Our search turned up 6 names:
Kaye is a portfolio services analyst for Standard & Poor's