Fitch: Global Rating Activity Balanced in First-Half 2005.

NEW YORK -- Global rating activity moderated in the first half of 2005, but the low U.S. default rate and mixed economic data could suggest the potential for deterioration in credit quality over the next several quarters, according to Fitch Ratings. In the U.S., a steady rise in both short-term interest rates and commodity prices are likely to negatively affect consumer-related industries as companies seek to push their increased costs on an already overburdened consumer. Fitch also believes that the increase in leveraged buy-outs, investor activism, and hedge fund activity could apply additional negative pressure on credit quality.

In first-half 2005, downgrades closed the gap on upgrades as the ratio of downgrades to upgrades approached 1:1, compared with a ratio of 0.6:1 during first-half 2004. On a quarter-by-quarter comparison, in second-quarter 2005, corporate finance downgrades outpaced upgrades for the first time since third-quarter 2003. The most notable rating activity occurred in the automotive sector, with General Motors being downgraded twice by Fitch in first-half 2005, most recently to 'BB+' in May. As expected, auto suppliers were also pressured with ratings of Delphi and Visteon being lowered deep into non-investment-grade status.

Global corporate rating activity was fairly balanced in first-half 2005 with 49 upgrades to 58 downgrades. The main contributors to corporate downgrades were in the power and gas and consumer-driven sectors. On the upside, the emerging market and high yield issuers drove the upgrade activity. The percentage of Negative Outlooks has continued to decline over the past year for most corporate sectors. In addition to GM, other notable fallen angels included Sears, Eastman Kodak, Kerr-McGee, and Liberty Media.

Rating activity for the global financial institutions sector was weighed heavily by the downgrades of the U.S. auto finance subsidiaries. The U.S. insurance sector also remained under pressure stemming from ongoing investigations. The most notable credit action was Fitch's downgrade of insurance giant AIG to 'AA+' from 'AAA' in March, followed by another downgrade to 'AA' in May.

Conversely, the credit picture for the global banking sector remained positive, with 72 upgrades compared with just 16 downgrades. The number of upgrades fell considerably compared with second-half 2004, but that is attributable to a smaller number of emerging market sovereign-related upgrades and fewer M&A deal closings.

Credit ratios for the U.S. public finance sector (excluding public power) improved significantly compared to the second-half 2004, with upgrades outpacing downgrades by almost two-to-one.

The full report 'Global Rating Activity - First-Half 2005' is available at www.fitchratings.com in the Credit Market Research sector page.

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