the productivity machine -g-
...debt expansion is being poured into investments in capital expansion that is driving productivity...
Credit Downgrades Surpass Upgrades,
Heightening Worries About Slowdown
By PAUL M. SHERER and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
The credit quality of U.S. corporations continued a two and a half year slide in the first half of 2000 and isn't likely to improve soon, Moody's Investors Service Inc. said Monday, raising concerns that any slowdown in the U.S. economy may come to haunt many companies.
Downgrades of companies' credit ratings swamped upgrades by a margin of 2 to 1 in the first half of 2000, the highest ratio since the 1991 recession, Moody's reported. Meanwhile, debt levels of corporations relative to their net worth reached the highest levels since 1993.
"There has been an erosion of corporate credit worth that investors ought to pay attention to," said Moody's chief economist, John Lonski. Heightening the risk: U.S. corporations are rapidly taking on new debt. Nonfinancial corporate debt outstanding grew 12.3% in the 12 months ended March 2000 to $4.47 trillion. That is more than double the average annual growth rate of 6.1% in the five years ended in 1997, Moody's said.
The debt surge has picked up steam lately. While rising interest rates and difficult conditions in the bond markets prevented many companies from selling new debt earlier this year, bond investors in recent weeks have again become eager for more deals, and companies are now racing to sell new bonds.
While warning signs about debt are growing, Moody's said it believes the U.S. is far from a replay of the last major bad-debt crisis, in the early 1990s. "We don't see the erosion as being as broad-based as it was in 1989 and 1990, and thus perhaps there's no reason to panic," Mr. Lonski said. Debt-to-equity ratios have surged as corporations borrow more to expand their businesses, a smart move when economic prospects are rosy, but more questionable if a slowdown ensues. The debt-to-net-worth ratio of nonfinancial companies was 81% in the first quarter of 2000, the highest since 1993. Debt levels had declined from a peak of 92% in 1990 to a low of 70% in 1997.
The biggest reason for the downgrades: investment-grade companies borrowing to buy back stock or purchase competitors, as well as lower-rated companies facing softer earnings and difficulties in the junk-bond market. The rise in debt levels reflects "increasing tolerance of corporate managers for greater risk as they try to satisfy shareholder demands," said Moody's senior economist, John Puchalla.
In the year's first half, there were 206 downgrades affecting bonds valued at a total of $312 billion and 95 upgrades valued at $206 billion. The downgrades were most concentrated among the speculative-grade companies that issue junk, or "high yield," bonds; these firms had 144 downgrades worth $61.1 billion, compared with 47 upgrades worth $26 billion. The outlook for credit quality is poor, Moody's said. In the second quarter, 50 issuers were put on review for possible downgrade, while only 33 were placed under upgrade review.
Still, some economists said the figures were not reason for excessive concern. "You're always worried about debt, but so much of this debt expansion is being poured into investments in capital expansion that is driving productivity gains, so it may be more likely to produce profits, rather than financial stress," said Robert DiClemente, chief U.S. economist at Citigroup Inc.'s Salomon Smith Barney. "There will be spectacular successes and spectacular failures." |
