A gradual but dramatic shift in U.S. corporate credit quality has occurred over the past two decades, a period during which speculative-grade ‘B’ category credit ratings have emerged as the largest rating category and displaced the ‘A’ category investment-grade ratings that previously dominated the U.S. corporate credit landscape a couple of decades ago. In a report titled "The Rise Of ‘B’ Rated Companies And Their Staying Power As an Asset Class," Standard & Poor’s Ratings Services chronicles this change and outlines the broader trends that brought it about, illustrated with company-specific examples.
More than 1,000 ‘B’ category issuers have tapped the credit market since the year 2000, which is one of the biggest trends in the shift toward lower credit quality. Through the 1970s, ‘B’ rated companies generally arrived at those ratings as ‘fallen angels,’ or previously investment-grade credits that were downgraded to speculative-grade ratings, but the majority of new issuers in present times first enter the credit markets with speculative-grade ratings.
The leveraged buyout (LBO) craze of the 1980s was a strong contributor to the rise of the ‘B’ rated company. Many highly rated companies were converted to speculative-grade, or "junk" credits through the LBO. By the end of that decade, this process helped transform the credit profile of Corporate America into one that would be dominated by high-yield credits. The ‘B’ rating category would be Standard & Poor’s largest by the end of the 1980s, in a universe that was dominated by the ‘A’ category less than 10 years earlier.
"The U.S. credit markets have come a long way since the Chryslers, Wilson Foods, and PanAms of the world represented Standard & Poor’s ‘B’ rated credits," said Nicholas Riccio, managing director and author of the report.
"However, if history has taught us anything, the ‘B’ seems to be here to stay. A surge in defaults that we would expect to accompany a turn in the credit cycle would cause the market to pause a bit, and Standard & Poor’s believes we’re likely to hit one of these periods toward the end of 2007. But after being counted out in the early 1990s and again in the early part of this decade, the high-yield market has roared back, and some would argue it has become even stronger."
Source: Standard & Poor’s