NEW YORK — Corporations are cleaning up their balance sheets and getting higher credit ratings, taking advantage of the low interest rates in this year's sluggish economy.
The leaden economic growth that has characterized the first nine months of 1993 has done wonders for corporate credit quality, rating industry analysts say.
If trends continue, credit quality during 1993 could hit levels not seen in almost 10 years, according to several industry estimates.
"The considerable economic uncertainty is helping credit quality by discouraging companies from steepening their leverage," said John Lonski, a senior economist at Moody's Investors Service Inc.
Facing more cautious lenders and an uncertain business climate, corporate treasurers are no longer in a position to pile on debt through speculative mergers and acquisitions the way many did during the 1980s, analysts said.
"In the late 1980s, people expected nothing more than a soft landing from the economic boom. Companies were more willing to increase their debt, even at the expense of lower credit ratings," Lonski said.
In addition to a trend of caution on debt, recent slow economic growth has prompted layoffs and other cost-cutting actions that have enhanced some credit quality. Those measures were a factor, for example, when Moody's boosted Chrysler Corp.'s debt into the investment-grade category last month, Lonski noted.
Also, low interest rates have allowed companies to refinance costly debt and thus bolster balance sheets.
So far this year, the two major rating agencies, Moody's and Standard & Poor's Corp., have reported that the number of corporate upgrades has been roughly equal to downgrades--a sign of credit stability not seen since 1984.
Analysts expect that trend to continue through the fourth quarter.
If predictions prove correct, 1993 credit quality will show sharp improvement over 1992, when S&P's downgrades exceeded upgrades by a ratio of 1.9 to 1 and Moody's downgrades surpassed upgrades by 1.7 to 1.
Lonski said Moody's downgrades surpassed upgrades by ratios ranging from 1.7 to 1 to 1.9 to 1 throughout the late 1980s. The ratio reached a peak of 4.4 to 1 during the depth of recession in 1990.
Wayne Josephson, vice president in the taxable ratings group at Fitch Investors Service Inc., said the media attention on the competition to buy Paramount Communications Inc. underscored just how much merger activity has slowed in recent years.
"In the heyday of (leveraged buyouts) in the 1980s, no one would have blinked an eyelash" at the Paramount deal, Josephson said.
The handful of mergers taking place are selective, strategic actions that have actually helped improve credit outlook, Josephson and Lonski said. Lonski cited US West Inc.'s purchase of a stake in Time Warner Inc. and Hanson Plc's buyout of Quantum Chemical Corp. as two examples.
The third quarter was an especially good quarter for credit quality, the rating agencies noted.
Moody's cut ratings on 32 companies while raising 39, producing a ratio of 0.8 downgrades to 1 upgrade. S&P cut ratings on 36 issues and raised 59. However, S&P downgraded a larger total amount of debt than it upgraded, its preliminary data showed. It cut $35.8 billion in debt and raised $25.1 billion.
Moody's downgraded $29.03 billion of debt while upgrading $67 billion.
Analysts expect the fourth quarter to be similar to the third quarter. "Our crystal ball doesn't show anything but more of the same," said Sol Sampson, an S&P analyst.
While many corporations have seen credit quality improve, many aerospace and computer firms have seen their debt lowered recently and could see it fall further, analysts said.
Analysts view the health-care sector as a major area of uncertainty. Lonski of Moody's said further details of President Clinton's proposed health-care plan could result in rating actions during the fourth quarter.