Copenhagen Stock Exchange Focus: Credit Quality Of Corporate Bonds - Improving Soon?

In recent years, the credit quality of issuers of corporate bonds has been under severe pressure and in 2001 and 2002, credit quality hit new lows.

In Focus no. 52 Analyst Aksel Tarras Madsen, Danske Bank, describes the extent of the deterioration in credit quality and tries to predict future development.

The article describes

• The historic scope of the deterioration in credit quality and the fact that the decline has been concentrated in the low rating categories

• The fact that there is no reason to conclude that European issues are less risky than US issues

• The author's prediction that credit quality will stabilise. Many companies will see their ratings being downgraded, although bankruptcies and suspension of payments will be fewer than in 2002 when those problems were at their worst. Moreover, credit problems occur most frequently among low rated bonds

• The positive expectations, which are mainly based on the corporate sector's current focus on debt reduction. The change of strategy is welcomed by bond investors after a long period of focus on shareholder value and debt-financed growth. It will take some time, however, for the new focus to be reflected in rating upgrades, and the current macro-economic conditions also do not help much.

Read the article "Credit quality of corporate bonds - improving soon?" in Focus no. 52 on the Copenhagen Stock Exchange's website.