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Tue, Mar 17, 2009 - Page 10 News List

Companies face refinancing risk, Moody's warns

US$300 billion DEBT: Moody's said that the number of borrowers at risk of losing their investment-grade ratings was at an 18-year high

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Non-financial investment-grade companies seeking to replace US$300 billion in debt maturing over the next three years face higher refinancing risk because of weakening economic conditions and tightened credit markets, Moody’s Investors Service said.

About US$99 billion of the debt is maturing this year, US$83 billion next year and US$117 billion in 2011, analysts led by Kevin Cassidy in New York wrote in a report released yesterday. More than half of those bonds have ratings in the A tier or higher, representing the top seven levels of investment quality.

The deepest global slowdown since the Great Depression is dragging down profits and eroding cash even at firms with strong credit profiles, the analysts wrote. Borrowers are slashing dividends, cutting capital expenditures and eliminating share repurchase programs to build up cash amid the turmoil.

“Maintaining a strong liquidity profile is critical as it will likely be costly to refinance upcoming maturities in 2009 due to expected continued weak economic conditions,” the analysts wrote.

Goldman Sachs Group Inc last week cut its forecast for the global economy for the second time in eight days, saying world GDP would contract by 1 percent, from a prior forecast of 0.6 percent on March 5. Goldman expects the US economy to shrink 3.2 percent this year and the UK economy to contract by 2.5 percent.

Yields relative to benchmark rates on investment-grade corporate bonds are at the widest level in 10 weeks, even as governments and central banks guarantee or purchase debt to loosen credit markets. Investment-grade spreads were at 600 basis points as of Friday, Merrill Lynch & Co's US Corporate Master index showed.

Non-financial companies will have to replace US$58 billion of debt in the second half of this year, compared with US$41 billion in the first six months of the year, the Moody's report said.

Investment-grade companies, which are rated Baa3 or higher by Moody's, will have an easier time than speculative-grade borrowers because investor demand for highly rated credits is growing, the report said. Investors' “flight to quality” and their need to put cash to work boosted non-financial corporate bond issuance more than 150 percent in the first two months of this year compared with the same period last year.

The number of borrowers at risk of losing their investment-grade ratings stands at an 18-year high, “a trend likely to continue” Standard & Poor’s said last week.

Globally, 82 borrowers with combined debt of at least US$209 billion are potential so-called fallen angels, or those that lose their investment-grade ratings, S&P analysts led by Diane Vazza in New York wrote in a report on March 9.

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