Downgrades Outpaced Upgrades In The Third Quarter In The U.S., Europe, Emerging Markets, And The Other Developed Region

Standard & Poor's Ratings Services downgraded 119 issuers and upgraded 106 globally in the third quarter of 2011. The 119 downgraded issuers had a total of $3.1 (€2.3) trillion in rated debt, and the 106 upgraded entities accounted for $409.6 (€300) billion in rated debt. We expect credit quality to continue to stabilize on a global basis, though some weak spots remain, specifically Europe and the global financial sector.

By issuer count, more than half of the rating actions in the third quarter were on U.S.-based issuers. The emerging markets followed with about one-fifth of rating actions by issuer count. However, by debt amount, sovereign rating actions in the emerging markets dominated, accounting for 73% of the rating actions globally and 99% of the rating actions in the region.

Standard & Poor's Ratings Services took rating actions on 26 sovereign issuers in the third quarter--16 downgrades and 10 upgrades. Downgraded entities were Belarus, Belize, Cyprus, Greece, Italy, Macedonia, Malaysia, Mexico, Morocco, New Zealand, Papua New Guinea, Trinidad and Tobago, Ukraine, the U.S., Venezuela, and Vietnam. The sovereign issuers Standard & Poor's upgraded were the Czech Republic, Estonia, Fiji, Israel, Kuwait, Paraguay, Peru, Suriname, Turkey, and Uruguay.

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In addition, Standard & Poor's took rating actions on 22 corporate issuers based in countries that experienced a sovereign rating change. Of the 22 rating actions, 17 were downgrades and five were upgrades. Italy accounted for the highest number of corporate rating actions, with six. Standard & Poor's lowered its ratings on four banks, one forest products and building materials company, and one water supply company in Italy after the sovereign downgrade. The U.S. followed, with four downgrades of 'AAA' rated insurance companies to 'AA+'. We did not include Knights of Columbus in this total because it did not have rated long-term debt (surplus notes) at the time of the rating action. For more information, see "U.S. Sovereign Rating Downgrade Has Knock-On Effects For Some Borrowers," published Aug. 10, 2011, and "Frequently Asked Questions: Assessing The Impact Of The U.S. Downgrade On Corporate Funding," published Aug. 15, 2011, on RatingsDirect on the Global Credit Portal.

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Although downgrades outpaced upgrades in all regions in the third quarter, the downgrade ratio--the count of downgrades divided by the count of total rating actions--remains below historical averages in all regions but the emerging markets. This is because severe periods of downgrades, including the most recent recession, have raised the historical average downgrade ratios about six to eight percentage points, depending on the region. The current downgrade ratios are in line with what we've seen during more benign periods.

Lower Negative And Positive Bias Levels Indicate Stabilizing Credit Quality

Similarly, negative bias (the count of issuers with negative outlooks or ratings on CreditWatch with negative implications divided by the total number of issuers) remains below the long-term averages across all regions. This implies that the pace of downgrades has declined from the highs reached in the past three years. Positive bias remains below its historical averages across nearly all regions as well. Together, these two measures imply that global credit quality will continue to stabilize, though not improve, in the near term, especially when factoring in the global economic and political uncertainty.

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The financial sectors have the highest negative bias levels, with financial institutions, brokerages, and banks at 39%, 23%, and 19%, respectively. The automotive; forest products and building materials; and chemicals, packaging, and environmental services sectors appear the most positive, with positive bias of 16%, 15%, and 12%, respectively. The recent downturn hit these sectors hard, leading to increases in downgrades and defaults to peak levels. Following this, positive bias has risen because of an increase in the proportion of issuers with strong business and financial risk profiles.

The shift toward more stable credit quality is best reflected in the aerospace and defense, capital goods, and telecommunications sectors, which all currently have stable bias of 82% of higher.

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For more information and analysis, see the following reports available on RatingsDirect:

• A Snapshot Of The Corporate Ratings Distribution For The U.S., Europe, Emerging Markets, And Other Developed Region, Oct. 6, 2011
• Global Potential Upgrades: Total Decreases For The Third Consecutive Month, Sept. 8, 2011
• Global Potential Downgrades: Count Increases To 465 Following The U.S. Downgrade, Sept. 8, 2011
• Australia, Canada, Japan, And New Zealand Have Nearly $1.1 Trillion In Debt Maturing Through 2015, July 20, 2011
• Nearly $4 Trillion Of European Corporate Debt Will Mature Through 2015, July 20, 2011
• U.S. Refinancing Study: Rising Maturities Could Increase Refinancing Risk, Especially For 'B' And 'CCC' Rated Issuers, July 20, 2011
• Q&A: Global Refunding Study Highlights Mounting Debt Maturities, July 20, 2011