Lowest-rated US companies benefiting from pursuit for yield

Thu Mar 21, 2013 12:59pm EDT

March 21 (IFR) - The number of US companies at the lower end of the ratings scale has continued to decline, as investors willing to lend to riskier companies in pursuit of yield has helped improve credit quality, according to Moody's.

The number of non-financial US companies on Moody's B3 negative and lower corporate ratings list continued to decline in the early months of 2013, the rating agency said in a report.

After hitting a 2012 low of 152 in December, the number fell to 146 as of March 1. At the same time a year ago, the list comprised 176 companies and nearly 300 at its peak during the financial crisis.

"Strong market access and slow but steady economic growth have continued to reduce the number of companies in the lower ranks of credit quality," said David Keisman, senior vice president and the lead analyst of the report.

The Federal Reserve has played its part by holding to its policy of large-scale bond purchases. That has allowed companies at the lowest end of the credit scale to fund at record low yields, although investors are now bracing for the inevitable moment when the Fed withdraws its stimulus.

Credit investors have become more cautious when it comes to duration, according to a recent Barclays survey, with some 30% of respondents intentionally reducing duration in their portfolios to limit interest rate risk.

In its policy statement this week, the Fed addressed the growing concerns among Fed officials about the negative consequences of the buyback programs, including the worry that they are inflating asset prices.

"The Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives," said the statement.

"We want to be sure that we are not unnecessarily encouraging excessive risk taking or other problems in the financial markets," Fed Chairman Ben Bernanke said during a press conference.

Strong investor demand, in turn, has allowed many companies to market bonds with weak covenant protections, according to Moody's. Covenant quality has been declining steadily since last July and hit it lowest-ever level in February, said the rating agency.

Such weak credit protection could become a significant issue for high-yield investors if the speculative-grade default rate begins to rise from its current historically low level.

However, continued access to credit markets for low-rated corporates should keep the trailing 12-month US speculative-grade default rate low.

The rate stood at 3.3% in February, below its average of 4.53% since 1993. Moody's baseline forecast calls for the default rate to end 2013 at 2.5%.

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