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S&P spells out improvement of US credit quality

A report by rating agency Standard & Poor's has shed light on the continued improvement of corporate credit quality in the US.

According to S&P, the US downgrade ratio ? the ratio of downgrades to total rating actions ? declined to 62% in the fourth quarter of 2004, bringing it in line with the 18- year downgrade average. This is a substantial improvement from the 70% recorded a year earlier.

In the fourth quarter of 2004, there were 61 upgrades and 98 downgrades recorded, which is an increase in upgrades and a decrease in downgrades compared with the fourth quarter of 2003. The full year downgrade ratio in 2004 was 61% versus 74% in 2003. The speculative-grade default rate fell to 2.29% in 2004, down from 5.52% for all of 2003 and below the 10-year average of 4.83%.

Despite a rise in the Fed Funds Rate, credit spreads have remained tight throughout the year because of high corporate profits, low default rates, and investors' hunger for yield. The distribution of outlooks among financials and nonfinancials has continued to show improvement.

Meanwhile, a recent increase in competition and other risks has slowed the positive momentum of the insurance sector.

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