Recent ratings trends suggest a brightening picture for corporate credit quality, says Moody’s Investors Service.

According to a new report from the credit rating agency, the number of monthly downgrades has plunged by more than two-thirds since December to levels last seen prior to Lehman Brothers” bankruptcy filing. Downgrades still outnumber upgrades, but the gap is narrowing, and there are one-third as many ratings under review for downgrade as there were in March, it reports. “These trends suggest a further ebbing of the downgrade wave,” said Moody’s group managing director, Mark Gray, author of the report.

The firm says that another sign of improvement is its Liquidity-Stress Index, which now sits at a nine-month low and has declined every month since its peak in March — pointing to improving liquidity for speculative-grade companies as the reopening of the high-yield bond market and narrowing credit spreads have allowed them to refinance their debts.

“Throughout the credit crisis, Moody’s corporate finance ratings have performed remarkably well as indicators of relative credit risk and probability of default,” Gray said. “Now our ratings are signaling improving credit conditions and a possible end to the slump.”

Despite the many positive indicators of improving credit conditions, the number of corporate debt defaults is likely to remain higher than average until mid-2010, Moody’s cautions. It forecasts the U.S. speculative-grade default rate will peak at 13.2% in November, followed by a steady decline to 4.1% by next August.

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