Risky Business..
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Risky Business..
Six. That's how many non-financial firms in the U.S. Standard & Poor's now lists with their top-credit rating, AAA.
Even at this time of vapid risk management, it seems incredible. Fifteen years ago, 25 firms rated AAA standing. But in a globally competitive world awash with liquidity, where companies manage balance sheets primarily to boost shareholder return and hedge funds hunger for risk above all else, AAA seems quaint. Piling on cheap debt and stock buybacks, which undermine creditworthiness, are the norm. Of the six AAA-rated companies, only one is debt free.
More than 50% of industrial firms are now speculative grade (i.e. BB+ rated and below) issuers, a cadre in which media, automotive, telecoms and high-tech firms are prominent. Include financial firms, mandated to maintain AAA by regulators, and half of U.S. issues make investment grade. In 1992, that number was 72%. The median dropped from A- in 1992 to BBB-, the lowest investment grade rating.
No wonder. The cost of a declining credit rating to borrowing costs is negligible. Only 13 basis points separate the yield on a 10-year corporate bond from an AA rated industrial firm and an AAA-rated company, Standard & Poor's managing director Diane Vazza notes in a research report. The premium for an A-rated company widens only to 24 basis points.
The industrial AAA super six could get fewer in number. Standard & Poor's may soon downgrade United Parcel Service (nyse: UPS - news - people ) and Pfizer (nyse: PFE - news - people ). The credit rating agency is concerned about the rising volume spreads on the credit default swaps UPS engaged in during negotiations with unions. In Pfizer's case, S&P worries a slowing new product pipeline could squeeze the balance sheet to keep up payments to shareholders.
That leaves just Exxon Mobil (nyse: XOM - news - people ), Automatic Data Processing (nyse: ADP - news - people ), General Electric (nyse: GE - news - people ) and Johnson & Johnson (nyse: JNJ - news - people ) as the only AAA industrial companies with stable credit outlooks.
Despite all this, the default rate at the end of September was just 1.3%. Standard & Poor's Vazza says that is likely to increase to 3.4% by the end of September 2008, which would imply 56 issues will default. Her worst case scenario: default rates will hit the long-term average of 4.5%.
More concerning is the growing volatility in credit markets brought on by the slide down the credit ladder. Investors who've grown used to easy returns may someday discover the same thing bankers did in the recent subprime mess: They call it risk for a reason.
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Even at this time of vapid risk management, it seems incredible. Fifteen years ago, 25 firms rated AAA standing. But in a globally competitive world awash with liquidity, where companies manage balance sheets primarily to boost shareholder return and hedge funds hunger for risk above all else, AAA seems quaint. Piling on cheap debt and stock buybacks, which undermine creditworthiness, are the norm. Of the six AAA-rated companies, only one is debt free.
More than 50% of industrial firms are now speculative grade (i.e. BB+ rated and below) issuers, a cadre in which media, automotive, telecoms and high-tech firms are prominent. Include financial firms, mandated to maintain AAA by regulators, and half of U.S. issues make investment grade. In 1992, that number was 72%. The median dropped from A- in 1992 to BBB-, the lowest investment grade rating.
No wonder. The cost of a declining credit rating to borrowing costs is negligible. Only 13 basis points separate the yield on a 10-year corporate bond from an AA rated industrial firm and an AAA-rated company, Standard & Poor's managing director Diane Vazza notes in a research report. The premium for an A-rated company widens only to 24 basis points.
The industrial AAA super six could get fewer in number. Standard & Poor's may soon downgrade United Parcel Service (nyse: UPS - news - people ) and Pfizer (nyse: PFE - news - people ). The credit rating agency is concerned about the rising volume spreads on the credit default swaps UPS engaged in during negotiations with unions. In Pfizer's case, S&P worries a slowing new product pipeline could squeeze the balance sheet to keep up payments to shareholders.
That leaves just Exxon Mobil (nyse: XOM - news - people ), Automatic Data Processing (nyse: ADP - news - people ), General Electric (nyse: GE - news - people ) and Johnson & Johnson (nyse: JNJ - news - people ) as the only AAA industrial companies with stable credit outlooks.
Despite all this, the default rate at the end of September was just 1.3%. Standard & Poor's Vazza says that is likely to increase to 3.4% by the end of September 2008, which would imply 56 issues will default. Her worst case scenario: default rates will hit the long-term average of 4.5%.
More concerning is the growing volatility in credit markets brought on by the slide down the credit ladder. Investors who've grown used to easy returns may someday discover the same thing bankers did in the recent subprime mess: They call it risk for a reason.
Companies: UPS | PFE | XOM | ADP | GE
E-Mail Newsletters: Sign Up Now To Stay Informed On A Range Of Topics
Attaché: Customize Forbes.com Now To Track This Author And Industry
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