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Thursday, 2 August 2007

S&P warns of rising number of sub-investment grade firms

SINGAPORE : Ratings agency Standard & Poor's (S&P) has warned that there is a rising number of Asian companies that are below investment grade.

It said investors need to price in the risks associated with such lower-rated firms.

With excess liquidity in the region, more investment money is flowing towards companies with a higher risk of defaulting on loans.

S&P said 51% of the 367 companies it rated in Asia this year were below investment grade.

This compared to 44% just a year and a half ago.

It expects the number of such companies to increase.

"We are seeing lower-rated entities coming into the market when financing was easy. Now, there might be a change in risk appetite and we're likely to see some liquidity concerns especially in financially vulnerable entities. Therefore, we are expecting defaults to increase, especially from sub-investment grade," said Ping Chew, Managing Director (Asia), Corporate & Government Ratings, Standard & Poor's.

The stock market was jittery on Wednesday and S&P said it welcomes the correction.

It said the sell-off reprices risks, serving as a reminder that lower-rated firms are seen as riskier because they will have to pay higher interest rates or face bankruptcy when the money flow tightens.

But on the other hand, there are analysts who said investors should not be overly focused on company ratings in emerging economies.

Said Arjuna Mahendran, chief investment strategist at Credit Suisse: "Even though their debt is still graded as sub-prime or sub-investment grade, their financial credit worthiness has improved spectacularly. And as a consequence, you'll find that a lot of so-called "sub-investment" grade debt is not in my view sub-investment. These borrowers are extremely creditworthy.

"So I don't see any problem for the growth of sub-investment grade debt in the months and years ahead. We're just seeing a little bout of risk aversion right now, where heavy concentration on sub-prime mortgages in the US has led to fears of excessive exposure to certain financial institutions and lenders."

Credit Suisse expects concerns over sub-prime mortgages in the US to blow over by September, when affected lenders take the hit or close shop. - CNA /ls

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