S&P: Trouble Spreading in Consumer-Linked Sectors

Tuesday, August 11, 2009 2:10 PM

NEW YORK -- Poor consumer demand amid economic turmoil and choppy credit markets will continue to pressure U.S. companies in consumer-dependent sectors for the remainder of this year, Standard & Poor's said in report on Tuesday.

Companies in consumer products, media and entertainment and retail and restaurant sectors continue to feel the worst effects of the economic downturn and will likely see the most defaults through the remainder of 2009.

"These sectors consistently have the highest levels of risk among our lists of distressed companies, weakest links, and potential bond downgrades," said Diane Vazza, lead author of the report.

Distressed issuers are speculative-grade, or "junk" rated companies with securities yielding 1,000 basis points or more above comparable U.S. Treasuries. Weakest links are companies that are rated B-minus and are on review for downgrade or have a negative outlook.

Over the past 12 months, more than 95 percent of all rating actions in the media and entertainment sector were downgrades, surpassing the 89 percent of non-financial companies overall.

In the consumer products sector, more than 89 percent of all ratings actions were downgrades over the same period while retail and restaurant sectors together saw 82 percent.

With around 60 percent of the consumer products sector junk rated, the outlook remains negative for the remainder of this year.

However, consumer spending is expected to improve in 2010, which "could pave the way for a more stable outlook for (the) sector next year," Vazza said.

Meanwhile, around 67 percent of retail and restaurant companies in the U.S. are speculative-grade. Concerns in that sector include "the ongoing economic recession, weak credit protection measures, possible (loan) covenant breaches, and the inability to seek refinancing," S&P said.

Additional difficulties could arise for retail companies and restaurants because of a depressed housing market and rising job losses, S&P said.

And while companies in the media and entertainment sectors enjoyed record-setting election campaign spending last year, S&P expects U.S. advertisement revenue to plummet through the rest of the year.

"Although the pace of deterioration is showing signs of a slowdown, there are no signs yet of companies returning to growth," Vazza said.

With 81 percent of media and entertainment companies junk-rated, S&P said its concerns center on intermediate-term refinancing needs and a narrow margin of compliance with financial covenants.

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