Rating agency DBRS Ltd. reports that the global recession took a significant toll on corporate credit quality in the first quarter of 2009.

In the first quarter, there were 32 downgrades, versus only three upgrades, the firm reports. Moreover, of the 40 credits that were under review, 29 of them were “under review with negative implications”, nine were “under review with developing implications”, and just two were “under review with positive implications”. As well, the rating trends maintained by the firm were 80% negative, and just 20% positive.

In the firm’s report on the quarter, it notes, “The significant Q1 2009 contraction in the North American economy has severely tested companies’ ability to maintain margins, defend volumes and generate free cash flow. We expect the downgrade bias to persist as the economy de-leverages, consumer confidence wanes, government programs work their way through the economy and the restructuring of the financial sector and key industrial sectors such as auto are resolved.”

The firm is forecasting a GDP contraction of up to 2.5% in Canada in 2009, followed by an L-shaped recovery in 2010, with tepid nominal GDP growth.

“For the remainder of 2009 rating sentiment is expected to remain predominantly negative, with credits either under review with negative implications or with a negative trend. The resulting impact will likely see negative rating action on 20% of the credits DBRS rates, while upgrade activity is not expected to exceed 2%,” says Peter Bethlenfalvy, co-president, DBRS Ltd.

IE