Weakening U.S. credit quality, primarily in corporate finance, has led Fitch Ratings to downgrade its U.S. Fitch Fundamentals Index to -3 in the second quarter from -2 the prior quarter, placing the reading at its lowest level since the third quarter of 2009.
Indeed, six of the index’s 10 components had negative readings, while corporate defaults, high yield recoveries and the Credit Default Swap (CDS) outlook stayed at -10 in the second quarter this year, the lowest reading possible. The index scores range from +10 to -10 and attempt to gauge drivers or constraints on economic growth or decline.
"A key driver has been pressure in certain corners of the corporates area, leading to subdued growth expectations, higher defaults, and sharply lower recoveries, which at $0.20 on the dollar, are among the lowest that Fitch has seen,” said James Batterman, group credit officer, Fitch Ratings.
Worries about lackluster global growth and fizzling commodity prices have had staying power, dragging down the corporate capex forecast indicator into negative territory and dropping the corporate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) forecast in half to a reading of 5 in the second quarter, Fitch Ratings said. “Average corporate capex growth stands at just 2%, as companies weigh the costs and benefits of new investment,” William Warlick, senior analyst with Fitch Ratings wrote. The index’s ratings actions and outlooks component improved this quarter from a -10 reading to a -5 reading, still remaining in negative territory.
The only component of the index to remain strongly positive was the mortgage performance score’s of 10, as prime mortgage delinquencies stay low.
- Nicholas Stern, editorial associate