Meanwhile, as of Jan. 3, 2005, there was a reduction in the number of negative outlooks and CreditWatch listings accompanied by a flattening in the number of positive outlooks and CreditWatch listings at a relatively high level. This implies a stabilization of relatively optimistic rating trends in the coming quarters. Corporate profitability--notably in the U.S.--displayed vigorous growth for the second consecutive year in 2004, but projections for the rate of growth in 2005 are expected to show a visible drop. Meanwhile, corporate credit spreads remain compressed, notwithstanding some turbulence in the underlying government benchmarks. Concern has grown that speculative-grade spreads are "fully priced" and may be primed for disappointment.
At these levels, speculative-grade spreads have fully priced in the anticipated good news and bad news, and any deviation from the script could leave spreads vulnerable to a widening, although no blowout is anticipated. Momentum in capital spending has picked up steam in a variety of regions, most notably the U.S. and Asia-Pacific.
"The resurgence is mildly positive for issuance prospects because business borrowing should be favorably affected by acceleration in capital spending, but large cash balances on corporate balance sheets will continue to diminish external financing needs unless accompanied by a surge in merger activity," observed Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group.
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