WWW.MOODYS.COM ANALYST CONTACTS David Keisman Senior Vice President Tom Marshella Group Managing Director Randy Lampert Associate Analyst RELATED RESEARCH » U.S. Non-Financial Corporate Bond Issuers’ Maturities: Manageable Through 2012, but Expected to Soar Thereafter, Sept. 13, 2010 (127234) » Hard Data for Hard Times, July 21, 2010 (126338) » After Black Swans, Not What? Recoveries on Defaulted Debt as the New Normal Begins, May 2010 (124964) TABLE OF CONTENTS MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST (DATA AS OF SEPT. 1, 2010) 5 ANALYST CONTACTS 15 MOODY’S RELATED RESEARCH 16 Stay Tuned SHRINKING “B3 NEGATIVE AND LOWER” LIST SHOWS IMPROVING CREDIT QUALITY, BUT SLOWING PACE BEGS QUESTION: HOW LONG WILL IT LAST? The total number of companies on Moody’s B3 Negative and Lower Corporate Ratings List has dropped below 200 in the third quarter – the lowest level in two years – a sign that speculative-grade corporate credit quality is continuing to improve. The rate of decline in the size of the list is slowing, however, suggesting that it could be approaching a “new normal” level after the credit crisis greatly inflated the ranks of lower-rated companies. The shrinking of the list has continued despite a run of weak U.S. economic data and some volatility in high-yield bond spreads and issuance associated with concerns over European sovereign debt. Firming credit quality and solid corporate earnings have pulled many companies off the list through rating upgrades. While the sluggish economic recovery could push the B3 Negative and Lower population higher, we have yet to see any signs that it is. At the peak in June 2009, there were 288 companies on the list. As of this September 1, there were 195. The list (which begins on page 6) includes companies with a Probability of Default (PDR) rating of Caa1 of lower, or a B3 PDR with a negative outlook or a rating under review for a possible downgrade. FIGURE 1 A Shrinking B3 Negative and Lower List 100 120 140 160 180 200 220 240 260 280 300 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Count Probability of Default Ratings B3/Caa1 Caa2/Caa3 Ca Source: Moody’s THIRD QUARTER 2010
Transcript
WWW.MOODYS.COM
ANALYST CONTACTS David Keisman Senior Vice President
Tom Marshella Group Managing Director
Randy Lampert Associate Analyst
RELATED RESEARCH » U.S. Non-Financial Corporate Bond Issuers’
Maturities: Manageable Through 2012, but Expected to Soar Thereafter, Sept. 13, 2010 (127234)
» Hard Data for Hard Times, July 21, 2010 (126338)
» After Black Swans, Not What? Recoveries on Defaulted Debt as the New Normal Begins, May 2010 (124964)
TABLE OF CONTENTS
MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST (DATA AS OF SEPT. 1, 2010) 5
ANALYST CONTACTS 15
MOODY’S RELATED RESEARCH 16
Stay Tuned
SHRINKING “B3 NEGATIVE AND LOWER” LIST SHOWS IMPROVING CREDIT QUALITY, BUT SLOWING PACE BEGS QUESTION: HOW LONG WILL IT LAST?
The total number of companies on Moody’s B3 Negative and Lower Corporate Ratings List has dropped below 200 in the third quarter – the lowest level in two years – a sign that speculative-grade corporate credit quality is continuing to improve.
The rate of decline in the size of the list is slowing, however, suggesting that it could be approaching a “new normal” level after the credit crisis greatly inflated the ranks of lower-rated companies.
The shrinking of the list has continued despite a run of weak U.S. economic data and some volatility in high-yield bond spreads and issuance associated with concerns over European sovereign debt. Firming credit quality and solid corporate earnings have pulled many companies off the list through rating upgrades. While the sluggish economic recovery could push the B3 Negative and Lower population higher, we have yet to see any signs that it is.
At the peak in June 2009, there were 288 companies on the list. As of this September 1, there were 195. The list (which begins on page 6) includes companies with a Probability of Default (PDR) rating of Caa1 of lower, or a B3 PDR with a negative outlook or a rating under review for a possible downgrade.
2 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
A steady decline in the number of new additions is a key reason the size of the list has fallen so dramatically since the credit crisis (see Figure 2). In the three months ended Aug. 31, just 13 companies joined the list, compared with 35 additions in the year-ago period.
FIGURE 2
Fewer Additions to the List
0
20
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120
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160
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4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
New
Nam
es A
dded
New Names In 2 Quarter Moving Average
Source: Moody’s
Most removals from the list are now occurring due to positive rating actions rather than defaults or rating withdrawals. In the most recent period, 19 out of 27 removals occurred as a result of rating upgrades. A year earlier, 31 of 42 removals occurred due to defaults or withdrawn ratings.
COULD THE LIST GET LARGER?
Even under the best economic and financial market conditions, there will always be a layer of low-rated companies because ratings are assessments of relative credit risk – that is, they are a view of companies’ credit quality in relation to one another, rather than in comparison to an objective standard.
However, as conditions change, the number of companies at the lower rating levels – as captured by the B3 Negative and Lower List – will fluctuate. The current list may be at or near a long-term mean, although at this point there is not enough supporting data because we have been publishing the list only since 2008. Therefore, our historic data have captured only the surge in low-rated companies that accompanied last year’s dramatic spike in the speculative-grade corporate default rate, and the subsequent decline as companies either defaulted or received rating upgrades that took them to B3/stable or above.
The list does show us how much speculative-grade credit quality has firmed up. Most notably, the 195 companies on the list today are just a few dozen more than the 161 that were added to the list in the fourth quarter of 2008, as credit markets were turning a cold shoulder to most corporate borrowers amid the bankruptcy of Lehman Brothers Inc.
Today, companies are on the B3 Negative and Lower list as a result of more firm-specific factors, such as weak business conditions, rather than any broad contraction in credit. Companies generally have been able to tap receptive credit markets to refinance near-term maturities. Yet tepid business conditions and continued high leverage have kept many on the list for an extended period.
The question now is whether speculative-grade credit quality will take a turn for the worse, re-inflating the size of the B3 Negative and Lower list. That will be determined largely by the direction of consumer confidence, unemployment and capital spending, as well as the willingness of investors to continue lending to companies at higher risk of default in a quest for higher yields. The significant amount of debt coming due over the next five years remains a critical hurdle.
3 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
So far we’re not seeing any clear signs of an inflection in high-yield credit quality. One proprietary indicator, Moody’s Liquidity-Stress Index (Figure 3), had bumped up slightly in recent months, but the rate of increase has slowed. An increase in the liquidity-stress index indicates that a larger percentage of companies with Moody’s Speculative-Grade Liquidity (SGL) ratings are rated SGL-4. This is the lowest rating on the four-point SGL scale, and it indicates our view that a company has a weak liquidity profile for the coming 12 to 15 months. Despite this slight increase, the index is far below its credit-crisis peak in early 2009.
FIGURE 3
Moody's Liquidity-Stress Index
0%
5%
10%
15%
20%
25%
0
20
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100
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Number of SGL-4 issuers (left scale) SGL-4 as a percentage of all SGL issuers (right scale)
Source: Moody’s
Any significant increase in the size of the B3 Negative and Lower list would almost surely be accompanied by a surge in corporate rating downgrades relative to upgrades, as occurred during the credit crisis. But as the chart below shows, the ratio of upgrades-to-downgrades for non-financial companies in the Americas remains firmly to the upside, as it has been since late 2009. The number of upgrades has exceeded downgrades for 11 consecutive months. (At 100% on the chart, upgrades and downgrades are equal. A reading above 100% indicates there are more upgrades than downgrades.)
FIGURE 4
Upgrade/Downgrade Ratio for Corporates Remains Positive
0%
50%
100%
150%
200%
250%
300%
Jan-
08
Feb-
08
Mar
-08
Apr-
08
May
-08
Jun-
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Jul-0
8
Aug-
08
Sep-
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Oct
-08
Nov
-08
Dec
-08
Jan-
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Feb-
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Mar
-09
Apr-
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May
-09
Jun-
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Jul-0
9
Aug-
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Sep-
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-09
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-09
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Mar
-10
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May
-10
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Jul-1
0
Aug-
10
Source: Moody’s
The trends in the B3 Negative and Lower List support Moody’s expectation that the U.S. speculative-grade default rate will decline from 5.1% in August to 2.9% in December and 2.3% in August 2011. While many of the companies still on the list are highly leveraged and facing challenging business conditions, continued access to capital markets and significant refinancing activity in the past year should enable many to avoid default, even if they remain in deep speculative-grade rating territory.
4 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
Companies On and Off the Ratings List This Quarter
COMPANIES ADDED TO THE RATINGS LIST (13)
AmerCable Incorporated L-1 Identity Solutions, Inc.
American Casino & Ent. Properties LLC Penton Business Media Holdings, Inc.
Coach America Holdings, Inc. RAAM Global Energy Company
Dynegy Holdings Inc. Reddy Ice Holdings, Inc.
Edgen Murray II, L.P. Symbion, Inc.
Gaylord Entertainment Company USG Corporation
Geokinetics Holdings, Inc.
COMPANIES OFF THE RATINGS LIST (27)
REASON REASON
American Axle & Manufacturing Holdings, Inc. Rating raised to B2 Stable Educate, Inc. Outlook revised to Stable (B3)
American Safety Razor Company PDR Lowered to D Mattress Holdings Corp. Rating raised to B3 Stable
Apptis (DE), Inc. Limited Default Michaels Stores, Inc. Rating raised to B3 Stable
ArvinMeritor, Inc. Rating raised to B3 Stable Neiman Marcus Group, Inc.(The) Rating raised to B3 Stable
Atlas Pipeline Partners, L.P. Rating raised to B3 RUR Oriental Trading Company, Inc. PDR Lowered to D
Bankruptcy Management Solutions, Inc. Ratings Withdrawn Panavision Inc. Ratings Withdrawn
Bellisio Foods, Inc. Rating raised to B3 Stable Quiksilver, Inc. Rating raised to B2 Positive
BioReliance Corporation Outlook revised to Stable (B3) Shiloh Industries, Inc. Rating raised to B3 Stable
Blockbuster Inc. Limited Default Thermadyne Holdings Corporation Outlook revised to Positive (B3)
Brown Jordan International, Inc. Rating raised to B2 Stable Trailer Bridge, Inc. Outlook revised to Stable (B3)
Cohr Holdings, Inc. Ratings Withdrawn Trilogy International Partners LLC Outlook revised to Stable (B3)
Cristal Inorganic Chemicals Ltd. Rating raised to B3 Stable UAL Corporation Rating raised to B3 RUR
Diagnostic Imaging Group, LLC Outlook revised to Stable (B3) Unifrax LLC 1 Rating raised to B3 Positive
Duane Reade, Inc. Ratings Withdrawn
Building the MB3N List
Moody's applies strict rating criteria to assemble the B3 Negative and Lower Corporate Ratings list. Companies included on the list meet one of the following criteria:
1. A Probability of Default (PD) rating of Caa1 or lower
2. A PD of B3 and a negative outlook.
3. A PD of B3 with rating under review for downgrade
5 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
Moody’s B3 Negative and Lower Corporate Ratings List (Data as of September 1, 2010)
SGL COMPONENT SCORES
ISSUER_NAME
PROBABILITY OF DEFAULT
RATING
CORPORATE FAMILY RATING OUTLOOK
LGD ASSESSMENT AND ESTIMATE
SGL_ RATING
CASH FLOW SCORE
LIQUIDITY SCORE
COVENANT SCORE
ALTERNATIVE SCORE INDUSTRY SECTOR ANALYST
Accuity Inc. B3 B2 NEG 34 - LGD3 N/A N/A N/A N/A N/A MEDIA: MEDIA SERVICES SUZANNE WINGO Advanstar Communications, Inc. Caa2 Caa2 POS 49 - LGD3 N/A N/A N/A N/A N/A MEDIA: PRINTING - FC - MS SUZANNE WINGO Affinity Group Holding, Inc. Caa3 Caa2 STA 74 - LGD5 SGL-4
4 3 2 4 MEDIA PUBLISHING: NEWSPAPERS & MAGAZINES CARL SALAS
American Media Operations, Inc. Ca Caa2 RUR 28 - LGD2 N/A N/A N/A N/A N/A MEDIA: PRINTING CARL SALAS American Petroleum Tankers Parent LLC Caa1 Caa1 STA 19 - LGD2 N/A N/A N/A N/A N/A
TRANSPORTATION SERVICES: MARITIME JONATHAN ROOT
American Railcar Industries, Inc. B3 Caa1 NEG 71 - LGD5 SGL-2
N/A N/A N/A N/A WHLSL DSTRBTN: CONSUMER PRODUCTS - MS DANIEL MARX
6 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
SGL COMPONENT SCORES
ISSUER_NAME
PROBABILITY OF DEFAULT
RATING
CORPORATE FAMILY RATING OUTLOOK
LGD ASSESSMENT AND ESTIMATE
SGL_ RATING
CASH FLOW SCORE
LIQUIDITY SCORE
COVENANT SCORE
ALTERNATIVE SCORE INDUSTRY SECTOR ANALYST
Barneys New York, Inc. Caa3 Caa3 NEG 44 - LGD3 N/A N/A N/A N/A N/A RETAIL: SPECIALTY MICHAEL ZUCCARO BCBG Max Azria Group, Inc. Caa1 Caa1 POS 41 - LGD3 N/A N/A N/A N/A N/A RETAIL: SPECIALTY MICHAEL ZUCCARO Beazer Homes USA, Inc. Caa1 Caa1 STA 11 - LGD2 SGL-3
Beverages & More, Inc. Caa2 Caa2 STA 52 - LGD4 N/A N/A N/A N/A N/A RETAIL: SPECIALTY MICHAEL ZUCCARO Bonten Media Group, Inc. Caa2 Caa2 STA 17 - LGD2 N/A
N/A N/A N/A N/A MEDIA: BROADCAST TV & RADIO STATIONS - FC KAREN BERCKMANN
Bradken, Inc. B3 B3 NEG 74 - LGD5 N/A N/A N/A N/A N/A AUTOMOTIVE: PARTS ARVINDER SALUJA Brigham Exploration Company Caa1 Caa1 POS 73 - LGD5 SGL-1
1 1 1 4 ENERGY: OIL & GAS - EXPLN & PRODN FRANCIS MESSINA
Circus and Eldorado Joint Venture Caa2 Caa2 NEG 50 - LGD4 SGL-3 2 4 1 4 GAMING: CASINOS MARGARET HOLLOWAY
Claire's Stores, Inc. Caa3 Caa3 STA 33 - LGD3 SGL-3 2 4 1 4 RETAIL: DEPARTMENT STORES MARGARET TAYLOR Clayton Williams Energy, Inc. B3 B3 NEG 77 - LGD5 SGL-3 3 3 4 4
ENERGY: OIL & GAS - EXPLN & PRODN GRETCHEN FRENCH
Clear Channel Communications, Inc. Caa3 Caa2 STA 19 - LGD2 SGL-2
1 4 2 4 MEDIA: BROADCAST TV & RADIO STATIONS NEIL BEGLEY
Clearwire Communications LLC Caa2 Caa1 STA 32 - LGD3 SGL-2
1 4 1 3 TELECOMMUNICATIONS: INTEGRATED DENNIS SAPUTO
7 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
SGL COMPONENT SCORES
ISSUER_NAME
PROBABILITY OF DEFAULT
RATING
CORPORATE FAMILY RATING OUTLOOK
LGD ASSESSMENT AND ESTIMATE
SGL_ RATING
CASH FLOW SCORE
LIQUIDITY SCORE
COVENANT SCORE
ALTERNATIVE SCORE INDUSTRY SECTOR ANALYST
Cleveland Unlimited, Inc. Caa3 Caa2 NEG 36 - LGD3 SGL-4
ENERGY: UNREG - ELECTR PRODUCTION - HOLDCO JAMES HEMPSTEAD
8 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
SGL COMPONENT SCORES
ISSUER_NAME
PROBABILITY OF DEFAULT
RATING
CORPORATE FAMILY RATING OUTLOOK
LGD ASSESSMENT AND ESTIMATE
SGL_ RATING
CASH FLOW SCORE
LIQUIDITY SCORE
COVENANT SCORE
ALTERNATIVE SCORE INDUSTRY SECTOR ANALYST
Energy XXI Gulf Coast, Inc. Caa1 Caa1 STA 54 - LGD4 SGL-3
2 2 3 4 ENERGY: OIL & GAS - EXPLN & PRODN PETER SPEER
Euramax International, Inc. Caa1 Caa1 STA 58 - LGD4 N/A N/A N/A N/A N/A MANUFACTURING: COMPONENT FRANK GRBIC Evergreen International Aviation, Inc. Caa1 Caa1 NEG 32 - LGD3 N/A N/A N/A N/A N/A SERVICES: BUSINESS JONATHAN ROOT Evergreen Tank Solutions, Inc. Caa1 Caa1 NEG 60 - LGD4 N/A N/A N/A N/A N/A SERVICES: RENTAL SERVICES BRUCE HERSKOVICS Forbes Energy Service LLC Caa3 Caa2 NEG 38 - LGD3 N/A
N/A N/A N/A N/A ENERGY: OIL SERVICES PETER SPEER
FoxCO Acquisition Sub L.L.C. Caa1 Caa1 STA 33 - LGD3 N/A N/A N/A N/A N/A
MEDIA: CABLE TV & TELEVISION NETWORKS KAREN BERCKMANN
Freescale Semiconductor, Inc. Caa1 Caa1 STA 30 - LGD3 SGL-3 2 4 1 3 TECHNOLOGY: SEMICONDUCTOR GREGORY FRASER French Lick Resorts & Casino, LLC Ca Ca NEG 56 - LGD4 N/A
N/A N/A N/A N/A GAMING: CASINOS ZHENYU ZHAO
Funding Co. (Varel) Caa2 Caa2 NEG 31 - LGD3 N/A N/A N/A N/A N/A ENERGY: OIL SERVICES STUART MILLER GateHouse Media Operating, Inc. Caa3 Ca STA 65 - LGD4 N/A
N/A N/A N/A N/A MEDIA PUBLISHING: NEWSPAPERS & MAGAZINES CARL SALAS
Gaylord Entertainment Company B3 B3 NEG 84 - LGD5 SGL-3
3 2 3 4 LODGING WILLIAM FAHY
Geokinetics Holdings, Inc. B3 B3 RUR 44 - LGD3 SGL-4 N/A N/A N/A N/A ENERGY: OIL SERVICES PETER SPEER
Darren Kirk 416-214-3845 William Wolfe 416-214-3847
Michael Levesque 212-553-4093 John Zhao 212-553-0399
Daniel Marx 212-553-7267 Michael Zuccaro 212-553-4596
Moody’s Client Services Desk in New York: 212-553-1653
16 MOODY’S B3 NEGATIVE AND LOWER CORPORATE RATINGS LIST THIRD QUARTER 2010
Moody’s Related Research
SPECIAL COMMENTS
» U.S. Non-Financial Corporate Bond Issuers’ Maturities: Manageable Through 2012, but Expected to Soar Thereafter, Sept. 13, 2010 (127234)
» After Black Swans, Now What? Recoveries on Defaulted Debt as the New Normal Begins, May 2010 (124964)
»
»
Recoveries on Defaulted Debt in an Era of Black Swans, June 2009 (117573)
»
The Performance of Moody’s Corporate Debt Ratings, Aug. 4, 2010 (126508)
»
Turning the Corner? Ratings Suggest an Upturn, September 2009 (119980)
»
Gradual Recovery in Corporate Financial Ratios Will Support Stable Ratings in 2010, January 2010 (122333)
»
SGL Monitor Flash: Surge in SGL Upgrades Bodes Well for Liquidity, Sept. 1, 2010 (127331)
»
Speculative Grade Liquidity Ratings: Component Scores Provide Liquidity Insight, December 2008 (111515)
»
Probability of Default Ratings and Loss Given Default Assessments for Low Rated Non-Financial Companies in the U.S., Canada and EMEA Regions, June 2009 (114187)
»
A Closer Look at Caa: Characteristics of Caa ratings for nonfinancial corporate issuers in North America, August 2008 (110465)
»
Flexible Application of the LGD Model, November 2007 (105751)
DEFAULT REPORT
Loss Given Default Analytics: Users' Guide to Prioritizing Claims and Applying the LGD Model, September 2006 (99071)
» Monthly Default Report, August 2010 (127426)
RATING METHODOLOGY
»
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.
Probability of Default Ratings and Loss Given Default Assessments for Non-Financial Speculative-Grade Corporate Obligors in the United States and Canada, August 2006 (98771)
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