Junk-Bond Defaults Continue Apace - Moody's

by: Research Recap

Junk bond ratings continued on a downward trend in May and look set to continue as the number of companies with Moody’s lowest speculative grade liquidity rating matched the peak seen since such ratings were introduced in 2002.

Consumer-spending slowdown and higher prices for crude oil and other commodities are continuing to pressure the intrinsic liquidity of some speculative-grade issuers, Moody’s said, as SGL ratings downgrades exceeded upgrades by a wide margin in the month of May.

This weakened cash flow is also having knock-on liquidity effects for some issuers, contributing to increased revolver usage and diminished headroom under financial covenants. - Moody’s Vice-President/Senior Analyst John Puchalla.

Due to these liquidity pressures, SGL downgrades in May topped upgrades by 14 to 4, confirming that April’s balance between upgrades and downgrades (8 each) was not the beginning of a turnaround from the deterioration in speculative-grade issuer liquidity since the onset of the credit crisis last summer.

The top three SGL-4 issuers by loan volume in May were Abitibi Consolidated, Inc., Six Flags (NYSE:SIX), and McClatchy (NYSEMKT:MNI).

With SGL downgrades also outpacing upgrades by a more than two-to-one margin, a similar monthly trend seems to be shaping up for June. On June 6, Moody’s lowered the liquidity rating of Northwest Airlines (NWACQ) to SGL-3 from SGL-2.

The SGL ratings of Continental Airlines (NYSE:CAL) and United Air Lines (UAUA) were lowered to SGL-3 from SGL-2 in May, affecting a combined $14.5 billion of rated debt. Higher fuel costs, competitive pressure on air fares and the prospect of weaker demand for air travel contributed to the SGL downgrades, says Moody’s. Rating-outlook changes to negative from stable accompanied the liquidity-rating downgrades for both airlines.

On a more positive note, homebuilder Hovnanian Enterprises (NYSE:HOV) was upgraded after the company’s liquidity rating improved following its recent equity offering.

The number of issuers with an SGL-4 rating  lowest composite SGL rating rose to 47 in May – from 45 in April. That number, 47, was last reached in March and is the highest number of SGL-4-rated companies since Moody’s introduced the liquidity ratings in October 2002. The increase from April was tempered by the withdrawal of ratings on three issuers—Leiner Health Products, Linens ‘n Things (LIN-OLD) and Tropicana Entertainment— that filed for bankruptcy in the past few months. Moody’s typically withdraws the ratings of a company once the issuer files for bankruptcy.

In all, 472 Moody’s-rated companies have SGL ratings covering about $1.13 trillion of debt.