Bangkok--25 May--Standard & Poor's
The spread between both investment- and speculative-grade bonds and U.S. Treasuries has shrunk to record lows. Inflows from foreign investors and alternative investor demand have compressed spread levels and provided immense market liquidity, according to a report published yesterday by Standard & Poor's. The report, titled "The Leveraging Of America: Bonanza For Borrowers Squeezes Risk Premia For Investors," states that corporate bond spreads, which measure the additional yield required to compensate investors for increased credit and liquidity risk versus U.S. Treasuries of comparable maturity, steadily declined from 2003 to 2004 and have remained ranged bound over the past 30 months.
"Borrowers have taken advantage of the cheap money by increasing leverage to finance dividend recapitalizations, share buybacks, and M&A," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "With spreads compressed across all rating categories, the cost of maintaining an investment-grade rating no longer affords firms a significant cost advantage."
Investment-grade spreads slid close to 100 basis points (bps) from 2003 to 2005 and have averaged 133 bps during the past 12 months. The same can be seen for speculative-grade spreads, which contracted sharply from highs at 800 bps in January 2003 to an average range of 340 bps during the past 12 months. Speculative-grade spreads have remained under 300 bps for most of the first three weeks of May.
Ms. Vazza added "the market has also experienced a decline in the quality premium, which is the difference in borrowing as a speculative-grade credit versus an investment-grade credit. The quality premium has fallen 600 basis points over the last four years and is now in the 160 basis points range. With the cost of financing declining across all rating levels, corporations have been more willing to use leverage to achieve their business goals."
The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected] . Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contact:
Diane Vazza, New York (1) 212-438-2760
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