Press Release: DBRS Comments on 2001 Rating Activity

Press Release: DBRS Comments on 2001 Rating Activity
Date of Release: Jan 17, 2002
Greg Nelson, Kent Wideman / 416-593-5577 ext.2224, ext.2235 / e-mail:
gnelson@dbrs.com
Most rated entities (and their debt holders) did not look fondly on
2001, as a weakening economy coupled with increasingly aggressive
leverage by a number of corporations resulted in weakening credit
quality. As a consequence, downgrades far exceeded upgrades by a ratio
exceeding 4 to 1. DBRS has been increasingly concerned about the
pressures the equity market has put upon corporations. Increasing
buybacks of shares, special distributions to shareholders, increased
merger and acquisition activity (often debt financed), and increased use
of debt and/or a reluctance to issue new equity have all contributed to
the general weakening of balance sheets. With a softening of the economy
in the early part of 2001, and the additional traumatic events of
September, the economic ability of these entities to support
historically high leverage levels was compromised. DBRS had been
cognizant of the issues of increased leverage and this was reflected in
higher downgrade activity even before the weakness of 2001.
			2001		2000		1999
Upgrades		18		18		27
Downgrades		77		41		40

Despite the weakness of the economy and a number of specific challenges
affecting individual industries, only one entity was downgraded to
default in 2001: Algoma Steel Corporation. With the significant excess
capacity of the steel industry in general, trade frictions with the U.S.
and the softness of the economy in general, the highly indebted steel
operation was unable to meet its obligations. This was consistent with
the significant number of Chapter 11 (effectively bankruptcy) filings by
U.S. steel producers.
The smaller numbers of upgrades in 2001, was concentrated in the
stronger credits. Almost half of the upgraded entities were in the AA
range after their upgrade (note that ratings may have already been in
the AA range to start with). Downgrades were, however, concentrated in
the weaker credits. Almost half of all downgraded entities were in the
BBB range (or its equivalent on the short-term or preferred scale) after
the downgrade.
Ending Rating Category (Long-term equivalent basis)
			Upgrade		Downgrade
AAA			2			0
AA			7			4		
"A"			4			19
BBB			4			37
Non-investment grade	1			17

With the general consensus that the economy would not significantly
improve until at least the third quarter of 2002, any meaningful
improvement in credit quality would be unrealistic. With the
deteriorated balance sheets and the weak level of growth in 2002 (and
possibly 2003), credit quality would be expected to improve only by 2003
at the earliest. DBRS expects downgrades to continue to exceed upgrades
as companies adjust to a new economic circumstance that is far less rosy
than seen in the late 1990's. It will take years to work off the
excesses of this period.
Dominion Bond Rating Service Limited (DBRS) will publish a full report
shortly that will provide additional analytical detail on this rating
action. If you are interested in receiving this report, please contact
us at: info@dbrs.com.
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