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By Marine Cole
Corporate solvency will continue to improve in 2010 along with the economy and credit conditions, but credit ratings may not improve as quickly as investors expect, according to Fitch Ratings.
To be sure, the ratings firm expects its actions in 2010 to reflect "the slow, steady improvement of the overall economy," Fitch said in a report released earlier this week. Auto parts and retailers are two examples of sectors that have recently experienced stabilization in their operating performance and their prospects, and upgrades could occur more quickly in such cases.
But overall, Fitch noted it will be judicious in its upgrades, which suggests the credit ratings agency is concerned about the potential for a double-dip scenario. The firm may want to avoid having to lower ratings soon after raising them, which could subject it to further criticism only a few years after getting slammed for over-rating mortgage securities.
Fitch cited such concerns as the removal of federal assistance to key sectors of the economy, persistent high unemployment, high savings rates, regulatory uncertainties, pension underfunding, and commodity cost pressures.
"An improved economic environment is not a cure-all for the damage done during the credit crisis," Fitch noted.
In addition, the firm noted, most companies have not done enough to improve their balance sheets.
"The decline in operating results has left most companies with leverage metrics outside of what may normally be appropriate for the rating category," Fitch observed. "Stabilization of operating performance and improved liquidity are not alone sufficient to restore metrics and ratings."
Indeed, Fitch so far has done little more than upgrade its outlook for companies to negative from stable.
The caution shown by management will itself hamper economic recovery, the firm added, as weak capital investment and employment continue to be a drag on growth. And that could mean ratings will be slower to improve than investors currently expect, notwithstanding the apparent end of the recession and the robust recovery in the capital markets.
"Aided by a moderate improvement in demand, improved cost positions, and materially improved access to capital, U.S. corporate issuers have begun the long march to restore balance sheets and liquidity positions that were damaged during the credit crisis," Fitch noted.
But it concluded, "as a result of the numerous risk factors remaining that could flatten the trend of economic improvement, ratings upgrades are likely to lag the improvement currently discounted in the equity and credit markets."
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