Corporate credit quality has improved over the last year as company managers have responded to economic pressures to better their companies’ fundamentals, but great global economic risks remain, according to a report released today by research firm Gimme Credit.
Corporate credit quality has stabilized, according to the report, with 84% of upgrades last year going to stable from deteriorating. The firm credits the overall stabilization with actions taken by company managers, namely improvements in liquidity, leverage levels and sales numbers and margins.
“When faced with first a credit crisis and then a global recession, many managements took dramatic actions to cut costs and preserve cash,” Gimme Credit analysts said in the report. A
nalysts mentioned cutting dividend payouts, slashing capital spending and curtailing M&A activity as leading strategies.
The proportion of upgrades to downgrades switched dramatically last year. While 88% of rating actions in 2008 were downgrades and 12% were upgrades, upgrades accounted for 70% of ratings actions in 2009, with 30% of actions being downgrades.
However, only 16% of Gimme Credit’s upgrades were to improving, which indicates that there is still substantial risk for corporate issuers. Managers may have run out of cost saving options by now, and a recovering economy may bring back more lax standards.
“We will be watching closely to see if the financial conservatism engendered by the proximity of the hangman’s noose will be abandoned if and when the economy recovers,” said the report.