NEW YORK: The amount of sovereign and corporate credit on the cusp of being downgraded to junk status more than quadrupled in 2012, due primarily to an erosion in the credit quality of the world’s banking sector, Standard & Poor’s data showed.
At the end of last year, S&P rated $ 984.8 billion worth of debt, from 52 separate issuers, one step away from speculative grade, also referred to as junk. At the end of 2011, the number of credits that were one downgrade away from junk status was 38, representing $ 227.4 billion.
“Most of the downward pressure that affected potential ‘fallen angels’ was because of the European credit crisis,” Diane Vazza, credit analyst at S&P, told Reuters, referring to issuers whose ratings are close to being cut to junk.
Twenty-five issuers, or nearly half of the potential junk credits, were in the banking sector and of that group, eight were banks located in India.
S&P describes this group as issuers who are rated BBB-minus with either negative outlooks or ratings on its so-called CreditWatch with negative implications. The latter classification signifies that a decision on whether or not to downgrade is more imminent.
The US and Europe had the most entities in danger, each with 15 issuers. The Asia-Pacific region was next with 11 issuers.
The consumer products sector had six potential fallen angels, four of which were based in the US, S&P’s report said.
However, the actual number of fallen angels last year was 43. These credits represented $ 302.4 billion in par value. That was a slight improvement over 2011’s 45 credits, worth $ 363.4 billion, that were cut to junk.
On the flip side, the number of credits on the cusp of being lifted into investment grade status, referred to as potential rising stars, grew to 25 in 2012 from 22 in 2011.
Potential rising stars at the end of last year represented $ 229.1 billion in rated debt versus $ 78.7 billion at the end of 2011, Vazza said.
At year’s end, 15 of the potential rising stars were located in the US, with four from Europe representing the second-biggest concentration.
“The transportation and media and entertainment sectors have the most potential rising stars, with three issuers each,” S&P said.
Rising stars are defined as issuers currently rated BB-plus with either a positive rating outlook or on CreditWatch positive.
Credits upgraded to investment grade territory totaled 29 last year, representing $ 63.6 billion in rated debt. That was a decline from 2011, when 38 so-called rising stars, accounting for $ 143.4 billion in credit, were raised to investment grade, Vazza said.
“The fallen angels count exceeded the rising stars’ in 14 out of the past 25 years (1987-2011),” according to S&P.
Credit spreads over benchmark five-year US Treasuries for issuers in the BBB category were 175 basis points to 254 basis points in 2012. Spreads widened to a range between 326 basis points and 493 basis points for credits in the BB category.
The US Federal Reserve has said economic activity across the US expanded at either a moderate or modest pace in recent weeks with consumer spending picking up.
The US central bank painted a cautiously positive picture of an economy gathering steam across its 12 districts, although businesses and consumers were wary due to uncertainty over fiscal policy and conditions on the other side of the Atlantic.
“Hiring plans were more cautious for firms doing business in Europe or in the defense sector,” the Fed noted in its Beige Book report. It was compiled by the Federal Reserve Bank of Philadelphia based on data collected on or before Jan. 4, 2013.
US lawmakers agreed to hold taxes down for all American families who earn less than $ 450,000, but must still negotiate an increase in the US debt ceiling and measures to set aside deep automatic spending cuts, currently due to bite on March 1.
“Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report, with all 12 Districts characterizing the pace of growth as either modest or moderate,” the Fed said.
The previous report found that the economy had jogged along at a “measured” pace.
The Fed has taken bold steps to boost the US recovery and says it will hold interest rates near zero until unemployment reaches 6.5 percent, from current lofty levels of 7.8 percent, provided inflation does not breach a threshold of 2.5 percent.
Fed officials predict the US economy will grow by between 2.0 percent to 3.2 percent this year, but they are less optimistic on the prospects for employment, with forecasts for fourth-quarter unemployment ranging from 6.9 percent to 7.8 percent
Policymakers have promised to maintain an aggressive bond-buying program until the outlook for the labor market improves significantly.
In the current Beige Book, the Fed highlighted areas of improvement, most notably in the real estate sector and consumer spending. Manufacturing, on the other hand, was more mixed.
“The manufacturing outlook remained generally optimistic; however, capital spending plans were less uniformly positive,” the Fed said. A sustained upswing in business investment has been one of the components missing so far from a more pronounced improvement in growth and pick-up in hiring.
