The number of companies on Moody’s Investors Service B3 Negative and Lower Corporate Ratings List declined from May 1 to June 1 as it went from 283 to 290.
The reasons for the drop do not point to improvements in operations, however. Instead, defaults, particularly from the oil and gas sector, fueled the decline, according to Moody’s analysts. The firm removes companies from the list if they are upgraded to B3 stable or higher, or if they default or withdraw. For the first time in three years, defaults among the lower-rated issuers outweighed the credit-positive rating actions by Moody’s.
"While a decline in the size of this lower-rated population would usually be considered good news, defaults accounted for the decrease, which could signal broader issues ahead," analyst Julia Chursin said. In May, for instance, there were eight bankruptcies among companies rated B3 negative or lower; 75% of these companies are in oil and gas. Further, businesses in the sector accounted for some two-thirds of the eight distressed exchanges and one missed interest payment in May.
“May's distressed exchanges continue an unprecedented trend among energy companies to shore up their weak balance sheets via this form of out-of-court debt restructuring,” Moody's said. In total, the oil and gas sector represented 28.6% of the firms on the list from among the 24 sectors tracked by Moody’s.
A variety of sectors, however, were added to Moody’s list in April and May through rating downgrade and a revision of their outlooks to negative. Of the nine additions, three were from the consumer and business service sector, two from manufacturing and one each from consumer products, retail, automotive and metals and mining, the ratings agency said.
- Nicholas Stern, editorial associate