The outlook for credit quality is still weak, despite some positive signs, according to new research from Moody’s Investors Service.

The credit rating agency reported today that during the second quarter, the downgrade/upgrade ratio improved significantly to 9:1 from 25:1 in the first quarter. Also, there were 543 downgrades during the second quarter, down from 762 in the first quarter.

Despite that notable improvement, Moody’s says the current downgrade-upgrade ratio and absolute number of downgrades remain very elevated by historical standards. “Our current watchlists and outlooks also speak to the continuing negative credit environment,” said Moody’s analyst, Jennifer Tennant.

Although the percentage of issuers on review for downgrade in the second quarter fell to 9.0% from 9.7% in the first quarter, the percentage of issuers on review for upgrade also fell — to 0.8% from 1.0% in the first quarter, it noted.

Additionally, 30.9% of issuers had negative outlooks at the end of the second quarter, up from 26.7% at the end of the first quarter. The percentage of issuers with positive outlooks at the end of the second quarter fell to 2.5% of rated issuers from 2.7% at the end of the first quarter, said Moody’s.

The credit outlook for investment-grade issuers is slightly more positive than for speculative-grade issuers, Moody’s said. “Investment-grade issuers show more stability while speculative-grade issuers were more likely than investment-grade issuers to experience downgrades and upgrades in the second quarter of 2009,” said Tennant. Speculative-grade issuers were also much more likely than investment-grade issuers to hold negative outlooks.

IE