Report Sees End to Lengthy Term of Benign Conditions in Global Bond Markets

NEW YORK Jan. 6, 2005-- A lengthy term of benign conditions in the global bond markets is finally wrapping up, with the markets poised at a cusp, according to a report released by Standard & Poor's Ratings Services. Corporate bonds are now expensive, and investors will be challenged in their attempt to match the returns posted in prior years. Nevertheless, credit underpinnings are still solid, and gains will likely continue, although at a visibly slower pace. Among issuers, "cheap" financing will be harder to obtain notwithstanding steady credit fundamentals, in response to an increase both in the underlying benchmarks and a potential widening of bond spreads from their currently compressed levels. This implies that borrowing cost for issuers will likely increase, at a time when the corporate financing gap has just edged into positive territory. Global default rates appear to be at a trough, even though the forecast for the coming year remains low in historical terms.

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.

The full report, "Global Credit Trends: Quarterly Wrap-Up and Forecast Update," is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit research and analysis system. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling or sending an e-mail. The report is also available, listed under Global Fixed Income Research. If you have not previously registered with the site, you will need to do so to access this material.

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