The corporate debt markets last year weathered the worst credit conditions in a decade, reports Fitch Ratings. A three-pronged storm was to blame as weak corporate profitability, heavy debt burdens and headline bankruptcies created an unprecedented amount of credit deterioration. In addition, a confluence of so-called "event risks" — including corporate fraud and impending war with Iraq — worsened an already tight lending climate while putting corporate liquidity under additional pressure, according to Fitch. The end result? Escalating corporate volatility and default rates.
Fitch’s 2002 rating migrations also reflected the year’s rough credit conditions. A ratio of 3.4 downgrades were issued for every upgrade last year, which is an increase over 2001’s 3.3 to 1 ratio. "Rating volatility increased in 2002, in step with the broad deterioration in credit fundamentals. The percentage of issuers downgraded hit double digits for nearly every rating category," says Stephanie Mah, director of Fitch Ratings’ Credit Market research division.
Rating volatility also increased with each subsequent step down the rating scale. At-grade level, 87.3% of ‘AA’ and 89.8% of ‘A’ issuers held their rating in 2002, down from an annual average of 92.3% for both categories over the previous 12-year period. Meanwhile for ‘BBB’ credits, 85.5% held steady in 2002 versus a 1990-2001 annual average of 89.5%.
"Further, while downgrades towered over upgrades in 2002, the mix of upgrades to downgrades was more evenly split over the long term," says Mariarosa Verde, managing director of Fitch Ratings’ Credit Market research division.
With the backdrop of weakening credit conditions, it is hardly surprising that the number of Fitch-rated global corporate defaults also spiked in 2002. The annual default rate for Fitch-rated corporate obligors peaked at 2% last year, beating the 1.9% rate posted in 1991. Most of the strain originated from the non-grade sector, which produced a Fitch default rate of 7.5% for the year vs. a 0.33% default rate for the 2002 pool of investment grade issuers.