More companies layer on debt to spur growth: S&P

 @ibtimes
on April 12 2010 5:48 PM

Taking advantage of easy credit, highly rated U.S. companies are loading up on debt to expand and acquire rivals, sacrificing ratings in the process, Standard & Poor's said on Monday.

Credit ratings of firms including Kraft Foods , FirstEnergy Corp and Xerox Corp were downgraded in the first quarter after they took on leverage for acquisitions, and more such moves may be coming, S&P said in a report.

The trend reverses years of belt-tightening as companies cut costs and built up cash during the credit crisis that began in mid-2007.

We would not be surprised to see the re-leveraging trend continue for stronger entities, S&P said. The economic outlook appears to be improving and therefore more companies are likely to focus on strategic opportunities.

The increased appetite for debt by stronger companies contrasts with lower-rated firms, which are still trying to shore up their balance sheets, S&P said.

For many entities at the lower end of speculative grade, deleveraging is necessary because their debt burdens are unsustainable and severely limit their business prospects, the rating agency said.

As stronger companies increased leverage, their credit quality worsened noticeably in the first quarter. Rating downgrades outpaced upgrades by nearly three to two in the quarter for investment-grade companies, those rated BBB-minus or higher, according to S&P.

For junk-rated borrowers, by contrast, first-quarter upgrades outpaced downgrades by two to one.

An improving economy is encouraging stronger companies to invest in acquisitions as a rapid route to growth, S&P said last week. Many firms that came through the credit crisis and recession relatively unscathed are in a good position to acquire weaker competitors, the firm said.

However, downgrades often result when companies acquire weaker rivals, taking on their debt. FirstEnergy, for example, was downgraded to one notch above junk, or BBB-minus, after it announced its merger with lower-rated Allegheny Energy.

(Reporting by Dena Aubin; Editing by Leslie Adler)

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