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Debt Ratings, Coming Right Up!

Our weekly downgrade list may have to change its name. According to an encouraging report from debt ratings agency Standard & Poors, upgrades are on the up and up.

Titled “Upgrade Potential Across Credit Grades and Sectors,” the report states the the number of issuers poised for upgrade increased last month to 157, up from its five-year low of 136 in March. That number is still lower than the trailing twelve-month average. The number of issuers poised for downgrade shrunk slightly to 965, down from 992 in the prior month and down from the all-time peak of 1,028 in April.

It’s the second piece of encouragement for private equity firms in recent weeks, as excitement over buyout-backed IPOs continues to build. This prompted Dan and others to ask if private equity is “back,” to which I responded “no, portfolio companies have too much debt.” While it isn’t clear how many of the potential upgrades are set for the debt of LBO-backed companies versus non-sponsor-backed companies, this report seems to support the green shoots. According to S&P:

The extreme pressure felt across the credit spectrum in march 2009 has somewhat subsided as many market participant have greater confidence in the markets, noted by tighter spreads and an uptick in new issuance.

Sector-wise, the upgrades may be led by the telecommunications, health care, energy,utilities, and chemicals, packaging and environmental services sectors, which has a greater-than-average upgrade potential.

Private equity-backed companies poised for upgrade include Carlyle Group’s consulting firm Booz Allen Hamilton, which has a B+ rating with a positive outlook and Vitamin Shoppe, backed by Irving Place Capital, which has a B rating with a positive outlook.

Upgrade Potential Across Credit Grades and Sectors