Fewer Companies on Lower Corporate Ratings List Points to Declining Default Rate

There were fewer firms on Moody’s Lower Corporate Ratings List and earning its B3 Negative designation in the third quarter, pointing to a declining default rate in the year going forward.

The Lower Corporate Ratings List dropped 5% from the second quarter and is 26% smaller than its all-time high of 291 issuers, according to a new report from Moody’s Investors Service. "In the third quarter of 2017, most of the issuers that left our list of lower-rated companies did so due to rating withdrawals for reasons other than default," said Moody's Associate Analyst Julia Chursin. "Notably, the number of rating actions related to defaults among B3 Negative and Lower rated companies was the lowest we have seen so far this year."

The portion of energy and mining sectors’ shares of the B3 Negative and Lower list have dropped since commodity prices have stabilized, while the oil and gas sector’s share has dropped the most, though these companies still make up more than a fifth of the list, Chursin said. The consumer and business services sector has the next highest portion at 14%, followed by retail and apparel at 11%.

A majority of Moody’s indicators still point to easing credit and default risk for speculative-grade companies. Its’ Liquidity Stress Indicator dropped to 3.0% at the end of September from 3.5% at the end of June. Borrowers generally have good liquidity and access to favorable financing conditions, and Moody’s anticipates that the one-year U.S. speculative-grade default rate will drop to 2.3% in September next year, from 3.3% now.

Still, there are reasons to remain watchful. "Despite supportive credit conditions and accommodating markets, speculative-grade corporate family ratings continue to migrate lower and are now concentrated in the B2 and B3 rating buckets," Chursin said. "Event risk remains a concern for companies with weak balance sheets, particularly as interest rates rise."

– Nicholas Stern, managing editor

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