Upgrades and downgrades among global financials and nonfinancials weakened further in the first quarter of 2008, with downgrades outpacing upgrades by the widest margin since the fourth quarter of  2003, according to a report published from rating agency Standard & Poor's.
The report, titled Global Corporate And Sovereign Rating Actions: First-Quarter 2008, says that globally, 72 upgrades and 170 downgrades, its highest level since the second quarter of 2002, were logged among corporates in the first quarter.

"Uncertainty about the timing of a trough along with deteriorating housing, as well as corporate earnings, and other economic indicators continues to shake investor composure," said Diane Vazza, head of Standard & Poor's global fixed income research group. "In the first quarter, credit risk escalated substantially, notably in the financial sector. Tight liquidity, widening credit spreads, steep falls in share prices, and headline-making loss announcements because of subprime write-downs and rogue traders, among other financial maladies, contributed to extraordinary market turbulence."

The continued worsening of the US housing sector increased the pressure on US residential mortgage lending, to both balance-sheet portfolios and all mortgage-backed securities, not just subprime. Monoline financial guarantors also felt the pressure of the falling valuations of subprime securities and were forced to seek emergency capital infusions to avoid downgrades or defaults.

However, collateral damage in the corporate bond market has been limited to date, although signs of weakening are mounting, including a rising number of defaults (17 in the first quarter compared with six one year ago) and a downgrade ratio of 70 per cent, which is now higher than its most recent 10-year average.

Vazza added, "We expect the ongoing financial instability to add pressure, with downgrades and defaults accelerating as the year progresses. Downgrade ratios globally have been inching up steadily since the third quarter of 2007; this movement is even starker in the U.S., which is currently leading the rest of the world in downgrades.

However, in comparison with 2007 and 2006, factors linked with underlying operating performance will, in our opinion, adversely affect credit quality to a greater extent than such "bond-negative" financial strategies as acquisitions, buybacks, and dividend payouts."