Fitch: Corporate Bond Rating Trends Speak to Modest Recovery
U.S. corporate bond market rating activity remained muted overall in the second quarter but with a negative bias, according to Fitch Ratings. A feeble trend in upgrades speaks to unevenness in the economic recovery and underscores the severity of the financial crisis. Meaningful credit improvement has essentially been constrained.
Downgrades affected 1.2% of market volume, ahead of the 0.5% of bonds upgraded. Rating activity has been fairly stagnant in this recovery. Since first-quarter 2010, downgrades have averaged 1.4% per quarter and upgrades 1.2% on a dollar basis, Fitch said.
At the end of June, the largest rating pool remained the ‘A’ category at $1.7 trillion in size, with the ‘BBB’ group a close second at $1.4 trillion. Since early 2010, the ‘BBB’ portion (consisting of $1.15 trillion industrial volume and $0.3 trillion financial bonds) has expanded 47%. Simultaneously, the ‘AA’ slice ($0.4 trillion) has contracted 31%, while ‘AAA’ volume remains scarce, according to Fitch.
The ratings agency said, rating trends notwithstanding, new issuance totaled a robust $220.8 billion in the second quarter. Activity through the first half ($480.2 billion) suggests a record issuance year is possible for 2013, depending on the economy’s trajectory in the second half and reaction to the U.S. Federal Reserve’s policy directives. The par weighted average coupon of fixed-rate U.S. corporate bonds dropped further to 5.5% at the end of June from 5.6% at the end of March and 6.0% a year ago. The 8.0% year-over-year decline now spans both financial and industrial bonds, with the two broad areas registering average coupons of 5.1% and 5.7%, respectively.
Industrial issues now total $3.2 trillion, up from $2.2 trillion at the end of 2009. While financial bonds remain stuck at $1.3 trillion – virtually unchanged since the start of the recovery – issuance of $150.8 billion in first-half 2013 is the strongest since 2008. In July, financial issuance was also very good at $34.6 billion. In addition, the August 5 edition of the Federal Reserve’s Senior Loan Officer Survey showed stronger demand for commercial and industrial loans, improved demand for consumer loans, and more importantly, a greater willingness among banks to lend. These results suggest financial issuance may be rebounding, Fitch said.
For a full view of U.S. corporate bond market rating and issuance trends please see ‘Fitch U.S. Corporate Bond Market: Second-Quarter 2013 Rating and Issuance Activity’ available at www.fitchratings.com.