Ready to Climb the Credit Ladder

Which companies are poised to shed their speculative-grade credit ratings and join the investment-grade club? Here's the latest list

We at Standard & Poor's Ratings Services update monthly the list of credit issuers that become what we call rising stars -- those whose credit ratings are raised to investment grade (BBB- and above), from speculative grade (BB+ and below). We also tally those companies poised to make the leap in the future.

Why is an investment-grade rating so important? Ratings play a critical role in determining how much companies and other entities that issue debt have to pay to access credit markets -- i.e., the amount of interest they pay on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for issuers' borrowing costs. Indeed, the cost of capital decreases sharply when an issuer crosses the rising-star threshold.

An issuer's status as a potential rising star --defined as an entity that is currently rated BB+ with either a positive outlook or with ratings on CreditWatch with positive implications -- is a good leading indicator of an actual upgrade. A long-term study published by Standard & Poor's Global Fixed Income Research corroborates this unequivocally. CreditWatch status and outlooks are strong predictors of ratings behavior, both in the aggregate as well as when broken out by rating category, region, or sector. For example, of all BB ratings (BB+, BB, and BB-) on CreditWatch with positive implications, 74% are raised. Of all the BB ratings with positive outlooks, 45% are raised.

PROMISING SECTORS.

  The bottom line: Keeping track of entities with rising-star potential is important for investors, especially bondholders, who would experience a capital gain on the debt securities they own if their holdings were upgraded.

As of June 13, 2006, 24 rated entities globally were best placed to acquire rising-star status, one more than the number reported in May but 15 less than the count a year ago. Together, these 24 entities constitute US$34.64 (€27.5) billion in rated debt.

Globally, sectors displaying the highest count of potential rising stars included capital goods and insurance, with three entities each. In terms of rated debt outstanding, the oil and gas exploration and production sector was the most prominently placed for the highest amount of debt affected by potential upgrades, followed by utilities, transportation, and high technology.

U.S. EDGE.

  Of the 24 issuers most likely to benefit from potential upgrades, 15 belonged to the broadly defined industrial sector, two to utilities, and one was a sovereign issuer. Financials accounted for six entities, three each in banking and nonbanking financial institutions. Within the industrial sector, capital goods had the greatest number of entities (three) likely to attain rising-star status. Of the three issuers in the capital-goods sector, one was U.S.-based and two were from Europe (Finland and Germany). The European capital-goods sector continues to enjoy relatively strong conditions overall, and these are generally expected to continue throughout 2006.

U.S.-based issuers showed geographic preponderance among the current list of potential rising stars, constituting 13 of the 24 issuers. Based on rated debt volume, Allegheny Energy, a U.S.-based diversified energy company, was the largest issuer potentially poised to ascend to investment grade.

Here is our list of potential rising stars as of June 13, 2006:

  BB+ Rated Issuers With Positive Outlooks