Despite Improved Corporate Earnings, Credit Downgrades Are on the Upswing
multitude of corporate earnings have been SOb released for the first quarter of 1988, and they Hffl have been surprisingly good. It was initially believed that earnings would be up 5 percent to 10 percent, but they have been running a hefty 15 percent to 20 percent. Oddly enough, the stock market has not responded that positively to these upbeat earnings due to inflation fears and rising interest rates.</br></br>It also is interesting to note that the quality credit ratings on corporate fixed-income securities have continued to decline in the face of the good earnings. MoodyÛªs Investment Service just released their corporate review for the quarter, and it highlights these seemingly paradoxical events.</br></br>Of the 109 companies that incurred rating changes, 75 (69 percent) were downgraded and 34 (31 percent) were upgraded. A year ago, downgrades were 64 percent of the total.</br></br>The 75 companies that were downgraded had $137 billion in debt issues that were affected, compared to only $14 billion of debt securities of the 34 companies that were upgraded. The bulk of these came from two areas: automotive and banking.</br></br>A whopping $52 billion was represented by the downgrading of General Motors Corp. and its financing arm. General Motors Acceptance Corp. Another $40 billion of downgrades occurred with the lowering of the credit ratings by MoodyÛªs on eight money center banks. These downgradings were simply a continuation of the deterioration of the quality of bank loans, including loans to Latin American countries.