Moody’s Investors Service is cautious in its outlook for North American credit quality.

North American companies have increased liquidity and improved balance sheet strength as a result of a reduction in inventories and the sale of non-strategic assets, according to Mike Rowan, group managing director of Moody’s Corporate Finance Group.

“However, as a result, companies must determine how best to deploy their existing cash reserves. Event risk is increasing due to stock buybacks, acquisitions and divestitures, privatizations, large-scale decapitalizations, and leveraged buy-outs of formerly investment grade companies,” it notes. “This has resulted in a number of rating transitions from the investment grade rating category into the speculative grade category, a trend which Moody’s expects to continue.”

For the first quarter of 2006, the five industries exhibiting the most positive rating transitions included aerospace and defense, metals and mining, telecommunications, construction and engineering, and chemicals. The five industries with the most negative rating transitions were
automotive, natural products, consumer products, technology, and media.

“Overall, we are cautious about the outlook for North American corporate issuers in 2006,” said Rowan. “Bond spreads have tightened to extremely narrow levels. Furthermore, default rates are near a cyclical turning point and are set to begin to moderately increase by the end of the second quarter of this year.”