Credit Rating Downgrade Risk at 3-Year High, S&P Says

By Patricia Kuo and Chia-Peck Wong

Oct. 31 (Bloomberg) -- The number of borrowers at risk of credit rating downgrades rose this month to the highest since September 2005 as a global recession looms and the credit crisis crimps lending, Standard & Poor's said.

Borrowers rated investment grade AAA to junk B- that are a risk of downgrades rose to 786 in October, 28 more than September and up by 136 from a year earlier, S&P said in a report yesterday. Three times more borrowers face cuts than those on watch for potential upgrades, a trend that has lasted for about 15 months.

``Bond yields globally have priced in a much greater downgrade and default risk than the reality shows,'' said Hong Kong-based Dilip Shahani, head of global research for Asia- Pacific at HSBC Holdings Plc. ``The markets are now driven by technicals and inability to access liquidity, not fundamentals.''

The freeze in global lending following the collapse of Lehman Brothers Holdings Inc. led S&P and its peers to downgrade credit ratings on concern companies don't have enough capital to meet their debt obligations. Restricted access to funding is disrupting some companies' spending plans, which had already been curtailed by losses on U.S. debt-linked investments.

Hutchison Whampoa Ltd.'s $2 billion of 6.25 percent bonds, rated the seventh-highest investment grade by S&P, traded at a record yield of 11.6 percent on Oct. 27.

Record Yield

Noble Group Ltd., a Singapore-listed commodity supplier that forecast record profit for the third quarter, saw its $500 million 8.5 percent bonds trade at record 30.5 percent yield today, implying 96 percent chance of default, according to data based on JPMorgan Chase & Co.'s pricing model.

Globally, 28 companies defaulted in the third quarter, the most since 2003 and five more than in all of 2007, S&P said earlier this week.

``Despite materialized downgrades, the housing and financial sectors continue to show the highest downgrade risk, indicative of further rating actions if credit conditions continue to deteriorate,'' Diane Vazza, head of S&P's global fixed income research group, said in yesterday's report.

The U.S. leads potential downgrades with a quarter of the ratings on watch for cuts. Eighty-one percent of the 786 issuers at risk are rated below investment grade, the report said.

Fitch Ratings cut its outlook on the life insurance industry to ``negative'' on Sept. 29 on concern investment losses may erode capital. It was followed by S&P this month.

In Japan, Moody's Investors Service downgraded Aozora Bank Ltd.'s credit rating earlier this week on ``volatile'' earnings and uncertainty about future revenue. S&P has said it may lower Nomura Holdings Inc.'s rating after Japan's biggest brokerage posted a wider-than-expected second-quarter loss.

To contact the reporters for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net; Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net