More U.S. companies had their credit ratings boosted by Standard & Poor’s this year than saw them cut for the first time since 1997 as borrowers increased profits and stockpiled cash.
Ford Motor Co., the world’s most profitable automaker, and San Jose, California-based EBay Inc. were upgraded by S&P along with 756 others, compared with 722 downgrades, according to data compiled by Bloomberg. In 2009, S&P slashed corporate debt grades more than three times as often as it raised them, the data show.
Companies held $1.17 trillion of cash, the most on record compared with the value of their assets, as the U.S. recovered from the worst recession in more than 70 years. Rising confidence in the ability of borrowers to meet debt payments led investors to push relative yields down to the lowest since 2007.
“Corporate fundamentals are about as strong as we’ve ever seen them,” said Edward Marrinan, a credit strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut. The creditworthiness of borrowers will continue to rise even as they are tempted to accelerate mergers and acquisitions and repurchase stock, according to Marrinan.
S&P boosted grades for non-financial companies 1.5 times as often as it cut them, while Moody’s Investors Service issued 1.9 upgrades across those sectors for every downgrade, the companies said.
Company Profits Climb
Profits at U.S. companies climbed 26 percent in the third quarter from a year earlier, according to a Commerce Department report on Dec. 22. Economists at New York-based JPMorgan Chase & Co. said in a report this month that U.S. gross domestic product may increase 3.3 percent in 2011, from 2.9 percent in 2009.
“Looking into 2011, our expectation for the economy is that it’s going to be a pretty decent year,” Mark Gray, a managing director at New York-based Moody’s, said in a telephone interview. “If that turns out to be, it will be more of a matter of will than ability for companies that are in a position to improve their balance sheets.”
Elsewhere in credit markets, American International Group Inc. obtained $4.3 billion in credit lines to help repay its $182.5 billion bailout by U.S. taxpayers. Attachmate Corp. said it was seeking $1.09 billion in loans to finance its purchase of Novell Inc. and the cost of protecting corporate bonds from default rose after China raised interest rates.
AIG Credit Line
AIG said today in a regulatory filing that the credit it garnered, provided by more than 30 banks and administered by JPMorgan, includes two $1.5 billion facilities: one for three years and the other for 364 days.
The insurer must demonstrate access to capital markets before the U.S. fully withdraws its support, Treasury Chief Restructuring Officer Jim Millstein has said.
Attachmate, which is purchasing Novell for $2.2 billion, is seeking an $825 million first-lien term loan, a $40 million first-lien revolving line of credit and a $225 million second- lien facility, Waltham, Massachusetts-based Novell said today in a regulatory filing. Attachmate also plans to use $425 million in equity financing to help pay for the acquisition.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.23 basis points a mid-price of 85.87 basis points as of 5:16 p.m. in New York, according to Markit Group Ltd. China boosted interest rates to slow the growth of the world’s fastest-expanding major economy.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 0.45 to 105.5.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, or 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers, with 16 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose 0.5 cent to 92.6 cents on the dollar, the second-highest price this month. The index tracks the 100 largest dollar-denominated first-lien leveraged loans. Leveraged loans and junk bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.
In emerging markets, relative yields fell by 4 basis points to 236 basis points, or 2.36 percentage points, according to JPMorgan index data.
JBS SA, the world’s largest beef producer, declined the most in a month as plans to renegotiate terms of a convertible bond sale to Brazil’s development bank increased concern that the value of shares will be diluted. JBS fell 28 centavos, or 3.7 percent, to 7.29 reais in Sao Paulo trading.
The Brazilian meatpacker is in talks to sell 4 billion reais ($2.4 billion) of 8.5 percent local bonds that must be converted into stock in five years to the state bank known as BNDES. The notes would replace existing debt and eliminate the need for an initial share sale of JBS’s U.S. unit, according to a regulatory filing.
Relative yields on U.S. company bonds compressed this year as investors gained confidence the recovery will help the riskiest borrowers avoid default. At the same time, junk-bond issuance reached a record as companies rated below investment grade took advantage of bond buyers seeking higher yields as the Federal Reserve held its benchmark interest rate near zero.
Spreads on junk bonds narrowed 102 basis points in 2010 through Dec. 24, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. They touched 537 basis points that day, the tightest since November 2007, the index data show.
About half of non-financial companies upgraded by S&P were rated in the B range and 16 percent were in the CCC or CC tiers, according to a Dec. 15 report from the New York-based firm.
The default rate for speculative-grade borrowers fell to 3.4 percent last month from more than 11 percent a year earlier. It may decline to 2.4 percent by September 2011, S&P said. Moody’s estimated this month that defaults may fall from November’s 3.5 percent rate to 2.1 percent next year.
Investment-grade spreads have contracted 23 basis points to 167 from 190 at the end of 2009, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
Companies will find it more difficult to improve their creditworthiness after cutting costs and taking advantage of investor demand for their debt to extend maturities, Diane Vazza, head of global fixed income at S&P, said in the report.
“We expect only modest revenue growth in 2011 and that margins will be flat to slightly down,” wrote Vazza, who didn’t return a telephone call seeking elaboration. “To this end, we would expect upgrades to slow in 2011 but downgrades to remain muted.”
Moody’s increased corporate debt ratings 742 times across all industries and cut them 847 times, Bloomberg data show. The downgrades include 97 rankings on hybrid securities issued by BB&T Corp., Fifth Third Bancorp and 30 other banks on Feb. 17, Bloomberg data show.
Bondholders may suffer in 2011 as cash-laden companies start tapping their war chests to expand, said John Hawley, a money manager in Des Moines, Iowa who helps oversee $22 billion of investment-grade bonds for Aviva Investors North America.
“If you just look at it from a balance sheet perspective, we’d think we’re pretty close to the top and would not expect it to get better from here,” Hawley said.
EBay, the largest e-commerce marketplace, was raised to A from A- by S&P on March 2. Moody’s followed on Aug. 19, boosting EBay to an equivalent A2. The change followed the company’s “good resilience during the challenging economic environment over the past eighteen months,” Moody’s said in a statement.
Ford’s unsecured debt rating was raised three times by Moody’s in 2011, to Ba3 from Caa1. The Dearborn, Michigan-based automaker, the second-biggest issuer of high-yield corporate bonds this year after Ally Financial Inc., sold $4.5 billion of debt through its Ford Motor Credit Co. unit at yields showing investors were betting it would be upgraded to investment grade.
Warren Buffett’s Berkshire Hathaway Inc. lost the AAA rating from S&P that it had held for almost 21 years on Feb. 4, the day it sold $8 billion of notes in a four-part offering to help pay for buying the railroad Burlington Northern Santa Fe Corp. S&P cut Omaha, Nebraska-based Berkshire’s grade one step to AA-plus. Moody’s downgraded it to Aa2 from Aaa on April 8, 2009.
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