U.S. corporate credit downgrades continue to outpace upgrades, but trends signal that the slide in credit quality may be slowing.

Moody’s Investors Services reports that there were 172 credit downgrades in the second quarter of 2002 affecting US$333 billion of bonds, overshadowing the 35 upgrades affecting US$49.7 billion. Rating downgrades exceeded upgrades by a margin of 4.9-to-1, the highest ratio since the record 6.3-to-1 in 1990’s fourth quarter.

Economic growth has resumed, but the increase in expenditures has not been great enough to prevent credit rating downgrades from climbing yet higher relative to upgrades, Moody’s said today.

“Falling asset prices, excess capacity, and weak capital spending — particularly in energy, telecom and high tech — helped credit rating downgrades far outnumber upgrades, says Moody’s senior economist, John Puchalla. “While efforts to pare leverage will be helpful, a definitive firming of corporate credit worth will be difficult to realize until revenues improve and corporate profits strengthen.”

According to Moody’s, the utility, energy and telecom industries accounted for the most downgrades. A slump in M&A activity and accounting and disclosure irregularities contributed to the wide gap between downgrades and upgrades. Health care and financial institutions received more upgrades than downgrades with credit improvement most pronounced among banks.

The ratings agency indicated that greater emphasis on de-leveraging and a firming of corporate earnings contributed to some improvement in review and outlook changes during the second quarter, which suggests that credit deterioration could begin to slow over the next year.

Moody’s said a firmer equity market would foster balance-sheet repair not only by promoting the substitution of equity for debt capital, but also by encouraging M&A activity that enhances credit worth.