Bangkok--2 Nov--Standard & Poor's The roster of upgrades and downgrades among globally rated financials and nonfinancials weakened in the third quarter of 2007, with downgrades outpacing upgrades by the widest margin since the fourth quarter of 2003, reflecting the weak credit profiles observed during the period, according to an article published by Standard & Poor's on Oct. 25, 2007. The report, titled "Global Corporate And Sovereign Rating Actions: Third-Quarter 2007," said that the current instability in the capital and financial markets worldwide has stalled M&A activity (including LBOs), with the total number of downgrade rating actions due to mergers globally declining to 8% in the third quarter from 11% in the second quarter and 14% in the first quarter. "In line with expectations reported in previous reports, this year is proving to be different from 2006 as a year when the credit markets see a clearer bifurcation between the haves and the have nots," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Whereas strong cash balances and greater financial flexibility will provide higher rated and more diversified companies with a cushion to withstand an economic deceleration, lower rated borrowers will be more challenged in a slower growth environment, which tends to expose the frailties of the weakest segments of the credit market. We expect credit quality to deteriorate, with downgrades and defaults picking up momentum up over the course of the next 12 months." Rising recession risks raise vulnerability as earnings decelerate and profits trends worsen. Among nonfinancials, the proliferation of shareholder-friendly financial policies that focused on maximizing leverage to the general detriment of bondholders are likely to generate credit pressures, particularly among the weaker segments of the rated universe. Overall, as of Sept. 28, 2007, 18.9% of global parent-level entities have a negative bias (either a negative outlook or on CreditWatch with negative implications), marginally lower than the 20.8% reported a year ago. The global total masks considerable divergence by region, with the negative outlook bias highest in the U.S. and Canada (23.9% and 24.5%, respectively) and lowest in the emerging markets (8.5 %). Ms. Vazza added, "We expect credit quality to show greater differentiation across regions. The U.S. is likely to lead any weakness, given that the credit cycle is more mature and risks expected to escalate from low levels as growth erodes. In Europe, positive momentum in the economic fundamentals witnessed during the first half of 2007 seemed to reach its peak and has now started losing pace with the decline in the manufacturing and services sector and the financial turmoil and economic slowdown in the U.S. The current financial environment is expected to have a moderate effect on European economies. Emerging markets appear to be currently less affected by the financial instability in the U.S., but persistent financial unrest and market turbulence could affect its credit quality prospects ahead." 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.