Credit-Rating Cuts Top Record Set in 2001, Moody’s Says

U.S. credit-rating cuts topped last year’s record as a slump in the energy and telecommunications industries hurt creditworthiness at companies as diverse as Mirant Corp. and Qwest Communications International Inc., according to Moody’s Investors Service.

Through Dec. 24, there were 647 rating cuts, two more than for all of last year, said John Lonski, Moody’s chief economist. Excluding wholesale electric power, telecom and technology companies, rating reductions would have fallen 16% from 2001.

The forecast for creditworthiness is better for 2003, Lonski said, as companies rework their accounting and keep indebtedness in check. Ratings help determine the amount of extra yield investors demand to buy corporate debt rather than Treasuries, with stronger-rated companies usually paying lower interest rates when they borrow. Corporate bond risk premiums shrank to five-month lows in December on optimism that companies’ prospects will improve.

“You’ve had so much borrowing restraint take effect, with companies managing their debt more conservatively and benefiting from lower borrowing costs,” Lonski said. “If these forecasts for an improving economy prove to be true, chances are you are going to have fewer downgrades and more upgrades in 2003.”

Ratings increases this year were the scarcest since 1991. Moody’s boosted ratings for 129 borrowers, compared with 219 last year, Lonski said. Cuts will outpace increases again next year, he said.

Mirant, Dynegy Inc., El Paso Corp., Qwest and WorldCom Inc. were among the companies whose ratings were cut in 2002 amid accounting inquiries and falling profits.

Energy traders faced heightened scrutiny after Enron Corp.’s bankruptcy filings in December 2001. Many top trading companies left the business or scaled back after regulatory investigations contributed to credit-rating cuts. Aquila Inc. quit wholesale trading in August, and rivals such as El Paso and Williams Cos. reduced their staffs. The three were among companies stripped of their investment-grade credit ratings at Moody’s in 2002.

Companies cut to below investment grade, or “junk,” accounted for about 30% of the quarter’s investment-grade rating reductions through the end of November, Moody’s said.

The five increases awarded to investment-grade companies in the fourth quarter was the lowest quarterly total in Lonski’s records, which date to the start of 1986. The previous low was the six increases meted out during the fourth quarter of 1987, he said. Bonds rated below investment grade fared better, with 20 ratings increases in the fourth quarter, Lonski said.

Risk premiums, or the extra yield offered above Treasuries, as of Dec. 24 averaged 1.86 percentage points for investment-grade bonds, down from a decade high of 2.67 percentage points Oct. 10, Merrill Lynch & Co. reported. The average for lower-rated debt shrank to 8.82 percentage points from 11 percentage points.