The first half of 2017 saw an increase in speculative-grade companies seeking credit ratings for the first time since 2013, highlighting a potential intensifying risk for investors, says Moody's Investors Service in a report published Tuesday.
The rating agency is seeing a reversal in rating trends among speculative-grade firms in the first half of this year, the report says.
For the past three years, the number of firms looking for ratings has been on the decline, but this year that trend has reversed, and speculative ratings seekers are back on the upswing.
"Low interest rates and high investor demand have triggered a surge in the number of spec-grade companies looking for a first-time rating," the report says, and this, "heralds the return of more aggressive transactions that increase risk to investors."
Moody's rated 52 new speculative-grade companies in the first half of 2017. For the full year 2016, it rated 59 new firms, putting 2017 clearly on track to outpace 2016.
The transactions the credit rating agency is seeing this year are more aggressive, the report notes, with higher initial debt levels and weaker cash flow, which represents a rising risk to investors.
"Some newly rated companies have a limited or weak operating track record, and some are highly exposed to business cycles, while others use optimistic adjustments to arrive at their EBITDA," the report says. "Companies first rated in 2017 will rely more on EBITDA growth to reduce leverage."
"Active high-yield bond and leveraged loan markets, as well as issuer friendly conditions, have paved the way over the past 12 months for the current uptick in first-time spec-grade ratings. We expect this pace to continue as long as the overall market maintains its momentum," says Tobias Wagner, vice president at Moody's.