Moodys Analytics, a risk management solutions, has released its bi-annual Middle Market Risk Report analyzing trends in the U.S. private firm credit market. The reports findings show that U.S. private firm default rates decreased in the fourth quarter of 2009 for the first time since 2007. This change, however, may not indicate an improvement of the credit environment, as banks are moving borrowers to non-pass risk grades at a much faster rate than at any other time during the past ten years.
Banks downgraded nearly 29% of borrowers in their portfolios during 2009, said Credit Research Database Director of Moodys Analytics and lead author of the report, Jennifer Curtiss. While significantly less than the peak rate of 35% posted in 2007, its still higher than the 10-year historical average of 20%, which suggests that banks anticipate continued weakness in the credit-worthiness of borrowers. The sectors with the highest percentage of balances adversely rated are construction, agriculture, information, real estate & leasing, and manufacturing. The highest expected default frequency (EDF) levels as of December 2009 were for real estate & leasing, information, and arts & entertainment. The report also notes that the spread between the discount rate, a proxy for the cost of funds, and the coupon rate increased from 2.25% in June 2007 to 5.25% in December 2009, reflecting the increased premium expected in a riskier credit environment.
It is critical that banks improve their visibility into what is often an opaque market, said Susan Feinberg, Senior Research Director for Wholesale Banking at TowerGroup. Private firm default rates are an area where limited information is available, and access to this type of data can be an extremely valuable and powerful tool for commercial banks, asset managers, and corporations that are making credit decisions.
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