Bangkok--26 Aug--Standard & Poor's
After a gut-wrenching episode of financial turmoil in the fall of 2008, we are now beginning to see some pullback. The credit cycle looks set to enter its next phase, typified by the end of a recession, said an article published Monday, August 24 by Standard & Poor's, titled "On Cue, U.S. Nonfinancial Credit Quality Has Bottomed Out, But Is The Recovery Following The Script?"
Among nonfinancial issuers, downgrades and negative bias (proportion of issuers with a negative outlook or ratings on CreditWatch negative) have been declining since their most recent peaks in March 2009. In addition, spreads tightened significantly over the past four months, part of the powerful surge seen in both bond and equity prices.
The groundswell of liquidity in the bond market is helping to offset the still-dormant loan market, and the ratings mix continues to improve as growing ranks of defaulters cleanse the ratings pool of its most vulnerable entities.
"All of these factors are in line with what we typically see in the late stages of recessionary periods, as is the tendency for default rates to lag the economic cycle," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Nevertheless, our expectation is that this time around, the recovery process will be slower than normal."
A few reasons for this might stem from the slower pace of recovery in the credit markets.
The nonfinancial ratings mix at the start of this cycle was the worst on record.
Covenant pressure abounds, with an estimated 26% of speculative-grade-rated companies remaining at serious risk of potentially breaching covenants over the next six months.
Although the issuance spigot has opened, the outlook remains dim for the weakest-rated companies.
Loan-heavy capital structures have potentially weighed down senior collateral, and recoveries associated with secured loans likely will be more muted than average.
"On the positive side, the worst in credit quality may have already past," said Ms. Vazza. "In prior cycles, credit quality tends to stabilize at or near the end of the recession, as seen by a peak in the number of downgrades and negative bias. This occurs along with stabilization in equity and bond prices, credit market conditions, profits, and economic activity."
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