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Re:Downgrade rate down, default rate up (1 viewing) (1) Guest

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TOPIC: Re:Downgrade rate down, default rate up
#1338
mcole ()
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Downgrade rate down, default rate up 5 Years ago Karma: 0  
There are some interesting stats in the credit world, problem is, I'm not sure, put together, what they mean about where we are in the economic cycle?

Fitch Ratings is reporting a drop in the U.S. corporate bond downgrade rate to 5.5% in the second quarter from 14.5% in the first quarter. "U.S. corporate bond downgrades continued to dominate in the second quarter of 2009 but on a par basis had less impact than in the previous three quarters," the credit ratings agency said today. The biggest decline occurred among investment-grade financial companies.

Not so fast though, downgrades are still greater than upgrades. But does the slowdown mean we're hit rock bottom?

Then there's S&P, which said today as well that the corporate default rate keeps climbing and reached 9.4% in July, up from 9.25% in June and from 2.5% a year ago. "We expect the speculative-grade default rate to escalate to a mean forecast of 13.9% by July 2010, but it could reach as high as 18% if economic conditions are worse than expected.

The pace of downgrades is slowing down, yet more defaults are expected. What do you think these numbers tell us about the economic cycle?
 
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Last Edit: 2009/08/06 01:48 By mcole.
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#1414
Re:Downgrade rate down, default rate up 5 Years ago Karma: 0  
Which comes first, the downgrade or the default? Credit rating agencies have spent a lot of time recently catching up to the economic cycle. I think we should focus more on defaults and less on downgrades, given credit rating agencies' records.
 
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#1427
Ron F ()
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Re:Downgrade rate down, default rate up 5 Years ago Karma: 1  
I agree, and believe this is yet another reason the rating agencies should be radically restructured. As is, they've got an incentive to be late to the party. When you're paid by issuers, you're hardly likely to hurry to warn investors about those issuers credit problems.

Yes, the agencies will say they don't want to trigger defaults by acting too soon. But that just underscores their irrelevance, except as a crutch.

I say either regulate them effectively and change their incentive structure or strip them of their imprimatur as "nationally recognized statistical rating organizations." It's been used and abused for way too long.
 
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#1450
mcole ()
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Re:Downgrade rate down, default rate up 5 Years ago Karma: 0  
I don't agree that credit ratings agencies should spend more time on defaults than on downgrades. If anything downgrades should be announcing signs of defaults to come and they often fail to do so. It was the case with Enron back in the days and again with Lehman Brothers last year: the downgrades are late to come and a default suddenly comes as a big surprise to many.

This is why more and more the credit default swap market has been a good tool to see sentiments on which companies the market thinks are going to default next. They are not only usually more accurate but definitely more timely than credit ratings agencies.

This is mostly because CDS investors -- a lot of hedge funds -- can act on what they think is going to happen (they are pretty much betting on whether a company will default) and not on what has already happened like credit ratings agencies do.

But to be fair to the ratings agencies like Moody's, they aren't totally oblivious of the CDS market and have also started providing market-based ratings to complement their own ratings.
 
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#1516
mcole ()
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Re:Downgrade rate down, default rate up 5 Years ago Karma: 0  
We're still awaiting reform of credit ratings agencies, meanwhile their credibility keeps getting lower.

The latest is S&P and Moody's forecasting a pronounced divergence in default rates.

S&P sees it at 13.9%, while Moody's at 3.8%!!

It just doesn't make any sense anymore. So should investors take into account a default rate somewhere in the middle or just completely disregard both number and rely instead on their own calculations. Hard to say.

On a broader level, I feel like either people are tired of debating how to reform ratings agencies or they don't know how to do it or they just think that reform isn't possible when so few players have so much power in the market place.
 
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