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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: GROUND ZERO™ who wrote (41159)	6/29/1999 4:46:00 PM
From: clochard	Read Replies (1) \| Respond to of 94695

NEW YORK, June 29 (Reuters) - U.S. corporate credit quality, the ability to pay back borrowed money, will worsen in the third quarter and extend the downward path begun at this time last year, credit analysts predicted. ''I expect the negative trend to continue,'' said Nick Riccio, a managing director at Standard & Poor's. ''This is a broad-based trend. It is fairly diffuse.'' Credit analysts predicted ratings downgrades will outnumber upgrades in the third quarter, as they did in the first two quarters of 1999 and the final two quarters of 1998. Analysts also predicted default rates will continue to creep upward. Moody's Investors Service said its speculative-grade trailing 12-month default rate has so far risen every month this year, from 3.5 percent in January to 4.3 percent in May, the highest level since 4.6 percent in July 1993. The default rate in 1998 was 3.4 percent. The rate reflects the proportion of junk bond issuers that have broken some sort of payment promise in the last 12 months. High-grade defaults are extremely rare so the speculative rate is a good measure for the entire corporate bond market, analysts said. Analysts mostly agreed that these statistics portray a relatively gradual trend toward weaker corporate credit. But it's less clear what was driving this trend, which has taken place during persistently robust economic growth. The height of the global financial crisis late last summer helped spark the trend and perpetuate it, but analysts said it was not the only reason for the slippage in credit quality. Relatively loose credit conditions in late 1997 and early 1998 has also contributed to the current down trend in credit quality, said Eric Stephenson, a director at Fitch IBCA. ''You are seeing a lag effect,'' Stephenson said. ''I don't see this as a secular trend, I see this as a cyclical variation of what came in 1997 and 1998.'' Stephenson said conditions may begin to improve in six to 12 months in terms of defaults. Defaults tend to rise in June and July because there are more coupon payments scheduled in June with grace periods extending into July, he noted. Riccio said speculative-grade issues are the fastest growing part of the corporate bond market, so almost by definition downgrades and defaults will rise as a share of the market. ''We have seen a lot of high-yield activity,'' Riccio said. ''I don't necessarily think it means anything bad for the economy. You have to expect this at lower ends of quality.'' Sean Keenan, a senior analyst at Moody's, downplayed the default rate as a definitive short-term measure of overall credit quality. The rate reflects defaulting issuers relative to total issuers, so slowing growth of issuers can boost the default rate, he noted. ''From a credit quality standpoint, the default rate should not go much higher, barring any deterioration in borrowing conditions'' Keenan said. ''I would expect some improvement by the end of the third quarter.''