Daily News: February 14, 2013

Fitch: BBB Bond Volume Surges; Issuance up 32% Y/Y

In a special report on the U.S. Corporate Bond Market, Fitch Ratings notes that the share of U.S. corporate bonds affected by downgrades was 6.2% in 2012, down from 8.1% in 2011, but above the year’s 4.4% upgrade rate (versus 5.8% in 2011). Fitch said the top tier (AAA/AA) remains stuck at a little more than 9% of market volume.

The middle tier of A to BBB held steady at close to 69% of outstanding issues. Fitch said rating and issuance momentum continued to boost the BBB pool, which reached a new high of 32.1% ($1.4 trillion versus $1 trillion in 2009, up 44.3% compared with a market growth rate of 21.4% over the same period).

On issuance, Fitch said activity totaled $905.6 billion in 2012, an increase of 32% year over year (and exceeding the year’s scheduled maturities by a three-to-one margin). Not surprisingly, the vast majority (95%) involved fixed-rate bonds, Fitch notes.

On financial issuance, Fitch said in recent years, financial issuance has also tilted heavily towards fixed-rate bonds even if activity has been low. For example, the mix of fixed/floating rate bonds sold in 2012 was 85%/15% versus 45%/55% in 2007. Examining the fixed component, which now represents 88% of total financial volume of $1.3 trillion, reveals that the par-weighted average coupon of this slice is currently 5.27% down from 5.72% at the end of 2011.

Fitch said among industrials, downgrades actually rose year over year across both the investment and speculative-grade components of the market. Downgrades moved 4.1% and upgrades 2.8% of high-grade industrial volume in 2012 – compared with 2.1% and 3.6%, respectively in 2011.

Fitch notes that the sectors with the highest downgrade rates in 2012 included computers and electronics (21.1%, $39.6 billion), supermarkets and drug stores (15.6%, $5.1 billion), consumer products (11.1%, $6.3 billion) and transportation (10%, $12.7 billion). However, computers and electronics also had a considerable upgrade rate of 16.6% – a reminder of the diverse fortunes of the companies operating in this rapidly changing space. The thriving automotive sector enjoyed the second highest upgrade rate of 16%. At year-end 2012, the largest nonfinancial sectors within the U.S. corporate bond universe included energy (12.6% of market volume), utilities (12.3%), healthcare and pharmaceutical (10.9%) and telecommunication (7.7%). The market grew 10% in 2012 to $4.3 trillion in size.

To view the full Fitch Ratings report (PDF), click here.