In a new report, Fitch Ratings says that global corporate finance rating activity continues to show increased signs of stress so far this year.

Corporate ratings turned negative in the second-half of 2007, under the weight of rapidly deteriorating housing market conditions, according to a Fitch Ratings review, which also points to further credit weakness for the remainder of the year.

“What began as a series of financial market events has begun to take a toll on credit conditions in the broader economy,” said William May, senior director, Fitch Credit Market Research. “This evolving story is reflected in corporate rating activity, which illustrates the expanding nature of the credit crisis.”

Globally, the downgrade to upgrade ratio was 0.4 for the full year 2006 and then rose steadily over the first three quarters of 2007 before hitting 0.9:1.0 in fourth-quarter 2007, Fitch reported. In Western Europe and North America the downgrade to upgrade ratio for the full year 2006 was 0.5:1.0 and 0.8:1.0, respectively, before rising to 1:1 in both regions for the full year 2007. For the Q4, the downgrade to upgrade ratio in Western Europe and North America was 3:1 and 1.1:1, respectively.

“Through the first two months of 2008, Fitch’s global rating activity indicates further deterioration in credit quality as downgrades exceeded upgrades by a ratio of 1.6:1”, said Charlotte Needham, senior director, Fitch Credit Market Research. This decline was driven largely by activity in North America and Western Europe where the downgrade to upgrade ratios through February were 5.5:1 and 2:1, respectively.

The most significant deterioration in credit quality between the first half and second half of 2007 occurred in the financial sector as the ratio of global downgrades to upgrades among financial institutions rose to 0.9:1 in Q4, up from 0.4:1 in the Q3 and 0.3:1 for the first half.

The effects of the credit market meltdown continued to take a toll on financial firms in early 2008. Through February, the downgrade to upgrade ratio among North American and Western European financial institutions was 3.7:1 and 2.3:1, respectively, Fitch said.

While financial institutions bore the brunt of the sub-prime related credit market meltdown in the latter half of 2007, ratings deterioration in late 2007 and early 2008 extended into the industrial sector as well. In the first two months of 2008, there were a total of 35 downgrades among North American industrials versus only four upgrades (a ratio of 8.8:1).

Looking ahead, the majority of Fitch’s rating outlooks remain stable. However, the mix of negative to positive rating outlooks across industrial and financial credits in some regions – North America in particular – indicates the likelihood of meaningful deterioration in
2008, it said. Across U.S. industrials, the mix of rating outlooks was also negatively skewed but more balanced. However, within some sectors, notably the building and construction industry and the basic materials
industry, the rating outlook mix was more heavily tilted towards negative.