Given the uncertainty dogging financial markets all year, 2011 was decent in terms of credit downgrades, but that performance is expected to weaken a bit in 2012, DBRS says.
In its year-end review, released Tuesdday, the rating agency reports that its downgrade-to-upgrade ratio of 1.85 in 2011 was in line with the long-term historical average, “Notwithstanding the fact that 2011 represented a year of heightened global uncertainty and high volatility given the European sovereign debt situation and other economic challenges.”
The surprising performance came, it says, because most sectors have held up rather well. “The vast majority of global industries, outside certain sovereign and banking areas, have weathered the storms of the past year relatively well,” said Peter Schroeder, managing director at DBRS. “Following meaningful cost-cutting, reorganization and capital-preserving actions taken in 2010, most companies maintained relatively cautious stances in terms of their balance sheets and liquidity positions in 2011.” Additionally, low interest rates continued to be a benefit, it adds.
DBRS notes that many of the negative rating actions it took during the year came in the form of placing credits ‘under review with negative implications’ or changing the trend to negative rather than actual downgrades. “The ultimate resolution of these situations (i.e., whether they result in a downgrade or revert to stable ratings) is likely to pressure 2012 results to some degree, but the fact that the initial rating action was not simply a downgrade is still a positive comment on credit overall,” it says.
Indeed, it notes that there is no shortage of challenges for 2012. “Political leadership will be a key determinant in ensuring that inaction and/or political risks do not undermine market confidence and employment levels,” says Schroeder, “while providing productive support to deal with the difficult long-term structural deficit and debt challenges that exist in many countries.”
Even without further economic issues, DBRS says it expects at least a moderate increase in downgrades in 2012, “while the continuation of the current challenging economic environment will limit positive rating actions, with the end result a higher downgrade-to-upgrade ratio.”
“Overall, however, in the absence of a more-critical economic crisis, the absolute number of downgrades is not expected to be anywhere close to the very high levels witnessed in 2008–2009. Excluding the sovereign and European banking areas, the DBRS rating outlook for other industries in 2012 is neutral,” it says.