"Fitch currently has three times more BBB-/negative rating outlook issuers than potential near-term upgrades at BB+, implying more downgrades than upgrades among these issuers over the intermediate term," the ratings agency states in "Crossing Over," a special report whose inaugural issue was released late last month. Fitch plans to update the report going forward.
Although upgrades have outpaced downgrades in the borderline category so far this year, Fitch points out that those upgrades have been due either to M&A activity or to the termination of a leveraged buyout and adoption of investment grade financial policies and capital structure.
"Over the past few years Fitch has downgraded substantially more BBB- issuers than upgraded potentially rising stars," the ratings agency notes. "In particular, over the past couple of years there was a significant volume of downgrades associated with reviews triggered by the severity of the global economic downturn as well as Fitch's outlook for a relatively weak and prolonged recovery."
In addition, Fitch notes that while credit markets have improved and spreads have tightened for most issuers, "there remains a significant difference between the pricing of investment grade issuances and new speculative grade debt, although this price differential continues to tighten."
Much the same could be said for the difference in investment sales pricing—and the cost and relative ease of financing—for properties net leased to investment grade vs. non-investment grade tenants. By all accounts, buyers and lenders have been showing a clear preference for solid, high quality, investment grade tenanted assets.
Los Angeles-based George Smith Partners noted in one of its weekly emails earlier this month that it is working with a lender willing to provide non-recourse financing for single-tenant properties, including "near investment grade" tenants. Among the terms: 65% leverage (possibly as high as 75%), minimum of five-year leas, interest rates of 8.25% to 9.25% and no restaurants, franchisee fast food or government leased properties.
"While the credit quality of most sectors throughout Fitch's US corporate coverage is stabilizing with the economy, those issuers that are on the border of investment grade will continue to feel downward pressure over the near- to intermediate-term," Fitch managing director Nick Nilarp said in announcing the results of the first "Crossing Over" report.
"Although some outlooks will be resolved positively once there is a rebound from the recession, outlooks are not driven primarily by the macroeconomic cycle but by other key financial trends which continue to be a challenge for many corporate credits."
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