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Corporate collapses dent overall credit quality

Credit quality has continued to decline in the Australian and New Zealand capital markets over the first nine months of 2001.

Tuesday, October 2nd 2001, 8:20AM

Credit quality has continued to decline in the Australian and New Zealand capital markets over the first nine months of 2001, Standard & Poor’s managing director Chris Dalton says.

Using the number of rating upgrades and downgrades as a barometer of underlying credit quality, S&P says that local movements reflect global credit market trends for downgrades to outweigh upgrades by ratios of up to four-to-one.

However, the local trend is much less pronounced.

According to S&P, a total of 19 Australian and New Zealand companies were upgraded in the first three quarters of the year, compared with 38 downgraded during the same period.

"The overall two-to-one ratio of local downgrades to upgrades mirrors the pattern seen in global credit markets," Dalton says. "However, the lower multiple evident in Australia and New Zealand can, in part, be attributed to the absence of a local speculative grade bond market."

Within Australia and New Zealand the corporate sector bore the brunt of rating activity during the first three quarters of 2001 and presents a much bleaker picture than the headline data. A total of six corporate issuers were upgraded in the first nine months of this year compared to 27 downgrades.

This quarter’s ratio of 4.5 to one is an increase on the ratio for the first six months of this year.

"Not only is the trend of deteriorating credit quality evident in our downgrades but, of the 114 corporate entities currently rated by S&P in Australia and New Zealand, only five have either a positive outlook, or creditwatch positive, on their rating," Dalton says.

"Compared with the data to June 2001, the percentage of entities with negative outlooks, or with ratings on creditwatch negative, has increased from 19% to 27%of all corporate ratings in Australia and New Zealand."

Dalton highlights the rating of Pasminco, which has been lowered four times this year, and Air New Zealand, which has been downgraded twice, as indicative of the underlying trend.

He says that a turnaround in the downward trend of credit quality isn't expected any time soon.

"The collapse of Ansett and the uncertainty in world markets mean that Australian and New Zealand companies are facing increasing challenging times from a credit perspective," he says.

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