Fitch Ratings: Red Flags For US Corporate Bond Investors

Business Wire, Nov 12, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 12, 2002

Market based indicators are useful tools to help analysts detect and respond to changes in corporate credit quality, however, a company's credit worthiness and its rating, is the sum of many parts, according to a special report by Fitch Ratings.

'While Fitch's core discipline of fundamental credit analysis has not changed, the company has adopted some new analytic tools', said Robert Grossman, Chief Credit Officer, Fitch Ratings. 'These new tools are particularly relevant in the current environment where institutional investors such as bond funds, CDOs and others have replaced banks as the primary source of debt capital.'

Over the last year, Fitch, through its credit policy group, has employed the use of new traditional and non-traditional tools to help gauge Fitch-wide rating consistency and accuracy. Many of these new tools include market-based indicators, such as monitoring credit default swaps and bond price movements. Other new tools that Fitch has utilized range from simply repackaging traditional credit ratios and comparing and contrasting credit measures such as free cash flow or short term debt usage across companies, rating categories and industry groups, to increasing the analysis of independent macroeconomic data.

'Investors need to know that any of these indicators alone simply serve as a 'red flag' and are only used to detect the possibility of deteriorating credit quality', said Grossman. 'Free cash flow generation remains the most important measure when assessing corporate creditworthiness. We recognize that market prices do contain valuable information and enhance our process, particularly in analyzing a corporation's market access. But a rating system purely based on market prices would by definition be quite volatile and in boom times would be overly optimistic for most issuers.'

The report, 'Red Flags For U.S. Corporate Bonds Investors' is available on the Fitch Ratings web site at 'www.fitchratings.com' in the 'Credit Market Research' section under 'Research', or by contacting the Ratings Desk at 1-800-893-4824.