Moody’s: B3< credit rating signal future defaults

New York, June 23, 2011 — Moody’s Investors Service says the number of companies on its B3 Negative and Lower Corporate Ratings List has changed little in a year. While all is calm, a modest increase in movement of companies on and off the list in the second quarter may be an early signal of future defaults, rating withdrawals and rating upgrades for this population of low-rated, U.S. non-financial companies, Moody’s said in a new report.

The list of U.S. non-financial companies rated B3 negative and lower includes a core group of companies with weak business fundamentals, high leverage and elevated risk of default, Moody’s said. There were 174 companies on the list as of June 1, compared with 209 a year ago and nearly 300 in the wake of the credit crisis in 2009.

While the overall list size has remained steady for a year, there is movement of companies on and off the list each quarter. The number of companies added and the number removed together typically equal about one fourth of the total number of companies rated B3 negative and lower. In the second quarter, that percentage reached 27.6%, its highest level since 2009. This may foreshadow a trend of more churn in this low-rated population.

“It’s too early to say whether such a trend, if it occurs, would be driven by a broad improvement in speculative-grade credit quality that produced more rating upgrades, or by a pickup in defaults and rating withdrawals reflecting negative credit developments,” said David Keisman, senior vice president at Moody’s and author of the report.

For now, key indicators continue to suggest a stable credit backdrop. Moody’s speculative-grade default rate forecast calls for a decline to 1.8% by next May. The ratio of rating upgrades to downgrades for U.S. non-financial companies is positive, ratings under review for downgrade are modest, and Moody’s Liquidity-Stress Index is near all-time lows. However, catalysts that could drive more activity in the B3 Negative and Lower population include the end of the Federal Reserve’s quantitative easing, European sovereign debt concerns and volatility in commodity prices, the report says.

Companies are removed from the B3 Negative and Lower List if they default, have their ratings withdrawn, or receive a rating upgrade to B3 stable or higher. Companies join the list upon a rating downgrade to B3 negative or lower. According to the report, there has been an increase in the number of removals through rating withdrawals and upgrades, and a decline of removals resulting from defaults.