Fourth quarter credit upgrades continued to comfortably outpace downgrades says Fitch Ratings, but a number of divergent credit trends and negative undercurrents leave the credit picture for 2005 looking less favorable.

Higher commodity prices, particularly energy and steel, are beginning to be reflected in credit performance and present an ongoing concern, Fitch said. Strong activity on the M&A front, continuing into 2005, also drove a number of major rating actions, particularly in the utilities and telecommunications industries, it noted.

The financial institutions sector ended 2004 on a positive note, with upgrades exceeding downgrades by a 2:1 ratio and industry consolidation in the U.S. having a balanced effect on ratings, Fitch reports. Globally, upgrades in the sector substantially outpaced downgrades in all regions except North America, where the credit picture was weakened by several significant downgrades. Notably, the credit environment continues to be challenging for the U.S. insurance industry.

Overall positive momentum was regained for the global corporates sector in the fourth quarter, as global corporate upgrades outpaced downgrades by a ratio of 1.5:1, with a majority of the downgrades occurring in the investment-grade sector, the rating agency reported.

And, it added that the creditworthiness of sovereign issuers continued to strengthen during the forth quarter of 2004 as emerging market issuers accounted for all nine upgrades in the fourth quarter 2004. Credit quality in the municipal market also showed signs of improvement.