Corporate Debt – Has Creditworthiness Improved?

Ronald Fink doesn't think so.

Yet investors might not be so optimistic if they took a closer look at credit trends. The reason corporate creditworthiness has improved is not that companies have made great strides in paying down or refinancing their debt. That conclusion is based on a study for CFO magazine of the 100 largest North American issuers of debt by credit research firm Moody's KMV (MKMV), a subsidiary of Moody's Corp.

Instead, the improvement in credit quality reflects higher stock prices and lower asset volatility, the study indicates. How so? Simply put, corporate leverage is determined by trends in the value of both equity and debt. If stock prices rise, as they have since the equity market hit bottom in October 2002, such ratios as debt to equity and debt to total capital will naturally fall.

I think the larger point is that if the stock market is overvalued, as some believe it to be, then lenders are not accurately pricing debt with respect to risk. I don't know that much about this, but it is pretty interesting. Maybe some of you who are more informed than me can comment.

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