The U.S. corporate bond market's rating drift remained negative in first-quarter 2012 (1Q'12), but the par value of bonds affected by downgrades contracted sharply from a surge in 4Q'11 associated with additional stress in the banking sector, according to Fitch Ratings. Overall, downgrades and upgrades moved 1.8% and 0.9% of market volume, respectively, compared with 5% and 0.9% in the prior quarter.
Neither downgrades nor upgrades affected more than 1% of investment-grade volume in the first quarter. Rating activity was brisk only at the speculative grade level, which saw downgrades of 5.3% and upgrades of 2.5%. This was the second consecutive quarter that speculative-grade downgrades topped upgrades.
More than half of outstanding U.S. corporate bond volume (53%) has been brought to market since 2009 - this due to a perfect storm of supply and demand, companies eager to refinance, and investors seeking yield product. These dynamics have put significant downward pressure on borrowing costs.
The par-weighted average coupon of outstanding industrial bonds was down to 6.2% in March from 6.5% a year ago and 6.8% at the end of 2007. The decline was most pronounced at the investment-grade level, where the average coupon fell to 5.4% from 5.7% a year ago and 6.2% at the end of 2007. The average speculative-grade coupon has remained more level; currently 8.3% versus 8.4% a year ago (and 8.2% in 2007).
In recent years, U.S. corporate bond issuance has topped scheduled maturities by a margin of roughly two to one, but with refinancing the overwhelming driver of this activity, the market has not posted significant organic growth (especially given the retrenchment in the financial sector). At the end of March, the U.S. corporate bond market stood at $4.1 trillion in size, compared with $3.8 trillion at the end of 2007. Most of the market's expansion occurred over the past year.
The rating mix of outstanding issues is currently 77% investment grade, 23% speculative grade, deteriorating from 82%, 18% just prior to the credit crisis. At the end of March, $200 billion was slated to mature by year end (a modest 5% of market volume).
For additional details please see the full report, 'Fitch U.S. Corporate Bond Market: First-Quarter 2012 Rating and Issuance Activity' available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Corporate Bond Market: First Quarter 2012 Rating and Issuance Activity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677237
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