Downgrades on the up

Downgrades for both publicly rated credits and credit estimates are up year on year. Standard & Poor’s private credit estimates (CE) portfolio – a collection of the likely issuer credit ratings on unrated entities – had seen ‘CCC’ ratings grow to 5.2% by mid-November from 1.6% at the end of 2007.

For publicly rated companies in, ‘CCC’ credits make-up 8.8% of ratings in Europe, up from 3.3% 12 months ago.

S&P is expecting the situation to worsen. The environment for highly leveraged companies at the end of 2007 and the first half of 2008 was relatively benign, as the 12-month default rate was just 1.55% to June 2008.

The closing six months are expected to paint a very different picture, which will emerge early this year when S&P updates its LBO performance survey.

S&P’s research analyst Taron Wade said: “During those five months, for both companies with private CEs and those with public ratings, there were three times more downgrades than upgrades. The previous year, the ratio of downgrades to upgrades was about 1.6 times higher for companies with credit estimates and about equal for publicly rated companies.”

There have already been signs that companies are struggling to handle their debt repayments. For the 12 months to October 30, 2008, there were 38 covenant breaches, waiver requests, or related restructurings, compared with 18 in the previous 12 months – an increase of over 100%. In addition, the time from financing to experiencing problems with covenant tests has decreased dramatically in 2007 and 2008, compared with 2006.