Slew of credit rating downgrades as agencies reflect spreads

Friday 19th December 2008

The global economic slump is producing a slew of credit rating downgrades as agencies play catch-up to a deteriorating global economic outlook.

Rating reviews in the past 24 hours include Citigroup, cut two levels to A2 by Moody's Investors Service, the AAA rated General Electric and GE Capital changed to negative outlook, Rio Tinto cut one notch to BBB.

"Credit rating agencies are maybe catching up with the poor economic outlook," said Graham Ansell, head of fixed interest at ING New Zealand. "Yields have moved a lot on this."

The world's biggest economies, the US, Japan and the Euro-zone, may lead the first simultaneous recession of major economies since the Great Depression. The yield on 10-year Treasuries sank as low as 2.035% yesterday, a record low.

The rating cut on Rio, the world's No. 3 mining company, "reflects our expectation that profits, cash flows, and leverage will be too weak for the previous 'BBB+' rating, due to a sharp downturn in global economic conditions and the commodity cycle," said Alex Herbert, Standard & Poor's credit analyst, said in a statement.

Citigroup was lowered to A2 from Aa3 by Moody's Investors Service, reflecting "weakened earnings prospects" and the prospects that the firm won't produce "significant" retained earnings. Citigroup was the recipient of US$65 billion in government aid this year.

GE and GE Capital, which carry the top rating, were put on negative outlook by S&P. According to Bloomberg, GE is the biggest US issuer of corporate debt.

On Dec. 16, Moody's said it may cut its A2 rating on $2.4 billion of Telecom Corp. debt as a shrinking New Zealand economy exacerbates the impact of competition, which has squeezed its profit margin.

Telecom has suffered "a significant erosion in its margins and under current recessionary conditions Moody's believe that this situation will not be easily reversed," the ratings company said in a statement.

By Jonathan Underhill

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