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Bond Upgrades Top Cuts for First Time Since `07


U.S. credit-rating upgrades are poised to exceed downgrades this quarter for the first time since before markets froze as the economic recovery boosts company profits.

Standard & Poor’s lifted the ratings of 244 U.S. issuers, including Santa Clara, California-based chipmaker National Semiconductor Corp. and department-store chain Macy’s Inc., while cutting 211, according to data compiled by Bloomberg. Moody’s Investors Service upgraded 205 borrowers and lowered ratings on 131. Upgrades haven’t surpassed downgrades since the second quarter of 2007.

Corporate profits in the U.S. rose at the fastest pace since 1984 in the first three months of this year. Cash levels at investment-grade borrowers have surged 15 percent from a year earlier while debt has fallen 2 percent, according to JPMorgan Chase & Co., suggesting corporations are healthy enough to weather a slowing economy.

“I do see more upgrades coming,” said Ann Benjamin, chief investment officer of leveraged asset management strategies at New York-based Neuberger Berman LLC, where she helps oversee $7.5 billion of high-yield bonds and $5 billion of loans. “There’s plenty of good companies out there that may be misrated.”

In Europe, where governments are struggling to trim their budget deficits, S&P has upgraded 84 issuers this quarter and cut 167, while Moody’s has raised 40 and downgraded 121, Bloomberg data show.

Company Profits

U.S. corporate profits rose 34 percent in the first quarter compared with a year earlier, according to a Commerce Department report published June 25. Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, while debt fell to $2.3 trillion, JPMorgan analysts led by Eric Beinstein wrote last week.

Elsewhere in credit markets, the extra yield investors demand to hold investment-grade bonds instead of benchmark government debt was unchanged as of yesterday at 195 basis points, or 1.95 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has risen from this year’s low of 142 on April 21. Yields averaged 3.959 percent yesterday.

Indicators of corporate bond risk in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 5.53 basis points to a mid-price of 121.5 basis points as of 11:49 a.m. in New York, the highest since June 14, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 8.74 to 133.27, the biggest rise since June 7, Markit prices show.

Bondholder Protection

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

As Moody’s and S&P continue to lift rankings of U.S. corporations, spreads on investment-grade and high-yield debt will narrow, said Burt White, chief investment officer at LPL Financial Corp. in Boston.

The upgrades “are a real indication that we’re back to where we were,” said White, who helps oversee $284 billion, and recommends selling Treasuries and purchasing high-yield debt. “Corporate America is about as strong as they’ve been. The recession’s over, the recovery’s over, now we’re in expansion.”

The U.S. economy grew at a 2.7 percent annual rate in the first quarter, compared with a 5.6 percent pace in the last period of 2009, the Commerce Department report showed.

Consumer Confidence Falls

Still, confidence among U.S. consumers declined in June more than forecast as Americans became pessimistic about the outlook for the labor market and the economy. The Conference Board’s confidence index slumped to 52.9 this month from a revised 62.7 in May, figures from the New York-based private research group showed today. The median forecast called for a drop to 62.5, and the gauge was lower than all projections in a Bloomberg News survey of 71 economists.

Investors watch the so-called upgrade-downgrade ratio even as ratings companies draw criticism from officials such as Financial Crisis Inquiry Chairman Phil Angelides and state insurance regulators for assigning top-level grades to U.S. subprime-mortgage bonds that collapsed in value.

The gauge offers a snapshot of the business cycle because issuers’ credit quality varies with the state of the wider economy.

High-Risk Companies

At S&P, a unit of New York-based McGraw-Hill Cos., U.S. high-yield, high-risk companies accounted for 123 rating increases this quarter, compared with 81 cuts, Bloomberg data show. At Moody’s, 90 of the upgrades and 52 of the downgrades were of the riskiest companies. Speculative-grade companies are rated below Baa3 by Moody’s and lower than BBB- by S&P.

National Semiconductor, the maker of chips that control power in electronic devices, was raised one step to investment grade on June 11 by S&P, which cited revenue growth. Cincinnati- based Macy’s was raised one step by S&P on May 11, climbing to BB+ based on its “solid position” relative to rivals.

“You’re still in an environment where shareholders on balance would frown on the aggressive use of leverage by companies,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “You haven’t reached that point in the cycle where companies feel more confident about increasing leverage for the purported reason of enhancing long- term returns for common equity.”